Expert Q&A Done Based on the given Lagorge Systems, Inc's financial statements & assumption (Exhibit 1- 3). Please show all work! Using the Dividend Discount Model: . Cost of equity Current year (2018) payout ratio EPS in the first year of the first stage (year 2019) . Dividend payment per share in the first year of the first stage (year 2019) Dividend in Year 6 (year 2024) Terminal value in the Dividend Discount Model Equity value per share based on the Dividend Discount Model Using the Free Cash Flow to Equity (FCFE) valuation Model: Total capital expenditure in 2018 Total change in Operating net working capital in 2018 . Total net debt issued in 2018 Total FCFE in the first year of the first stage (year 2019) Total FCFE in year 6 (year 2024) Terminal Value in the FCFE valuation Model Equity value per share based on FCFE valuation model Using the Free Cash Flow to Firm (FCFF) valuation Model: . Current year total FCFF - WACC Total FCFF in the first year of the first stage (2019) . Total FCFF in 6th year (2024) Terminal Value in FCFF valuation model . 61 62 Change in Working Capital 63 (Increase) decrease in receivables $ (39.00) 64 (Increase) decrease in inventories $ (44.00) 65 Incerase (decrease) in accounts payable $ 22.00 $ (38.00) 66 Incerase (decrease) in other current liabilities $ 23.00 67 Cash provided by operating activities $ 427.00 68 69 Cash Flow from Investing Activities 70 Purchase of property, plant, and equipment 71 Net cash from investing activities 72 73 Cash Flow from Financing Activities 74 Change in notes payble 75 Change in long-term debt 76 Common stock dividends 77 Net cash from financing activities 78 Net change in cash and cash equivalents 79 Cash at beginning of period Do Cash at end of period 53 (349.00) (349.00) $ 10.00 $ 40.00 $ (90.00) $ (40.00) $ 38.00 $ 210.00 $ 248.00 After reviewing Lagorge Systems, Inc's financial statements and forecasts related to the new production agreements, You make the following assumptions 87 Lagorge System's earnings and FCFE are expected to grow 9 prgent a year over the next five years before stabilizing at 88 an annual growth rate of 3.5 precent Lagorge System's FCFF is expected to grow & precent a year over the next five years before stabilizing at an annual 9 growth rate of 2.5 precent 90 Lagarge Systems, Inc will maintain the current payout ratio for the next five years and go up to 45% after year 5 91 Lagorge Systems, Inc's beta is 0.9% 92 The 20-year government bond yield is 3.5 precent, and the market equity risk premium is 5.5 precent 93 Lagorge Systems, Inc's credit spread is 2 percent 94 Lagorge Systems, Inc's target debt to capital ratio is 40% 95 96 Assume you will use two-stage FCFE, FCFF and DDM models in which there are five years in the forecasting period 97 (from year 2019 to year 2023) 98 99 37 Total assets 38 39 Current Liabilities 40 Accounts payable 41 Short-term debt S 295.00 $ 317.00 $ 300.00 $ 310.00 42 Other current labdities $ 76.00 $ 99.00 43 Total current abilities $ 671.00 $ 726.00 44 Noncurrent Liabilities 45 Long-term debt $ 1,010.00 $ 1,050.00 46 Total noncurrent Eabilities $ 1,010.00 $ 1,050.00 47 Total Fabilities $ 1,681.00 $ 1,776.00 48 49 Shoreholders' Equity 50 Common equity 51 Retained earnings 52 Total equity 53 Total iabilities and equity S 450.00 $ 450.00 S 1,070.00 $ 1,265.00 $ 1,520.00 $ 1,715.00 $ 3,201.00 $ 3,491.00 54 55 56 Exhibit 3: Lagorge Systems, Inc Cash Flow Statement millions) 57 58 Cash Flow from Operating Activities 59 Net income 60 Depreciation and amorization 61 62 Change in Working Capital 63 (Increase) decrease in receivables 2018 55 $ 285.00 180.00 4. $ (39.00) 64 (Increase) decrease in inventories $ (44.00) 65 Incerase (decrease) in accounts payable $ 22.00 $ (38.00) 66 Incerase (decrease) in other current liabilities $ 23.00 67 Cash provided by operating activities $ 427.00 68 69 Cash Flow from Investing Activities 70 Purchase of property, plant, and equipment $ (349.00) 71 Net cash from investing activities $ (349.00) 72 73 Cash Flow from Financing Activities 74 Change in notes payble 76 Common stock frid 75 Change in long-term debt $ 10.00 10.00 1234 5 6 7 E You are supposed to reseach Lagorge Systems, Inc, a US-based company. Lagorge Systems, Inc has released the 2018 financial statements shown in Exhibits 1, 2, and 3 Exhibit 1: Lagorge Systems, Inc Annual Income Statement (in millions) 8 Sales 9 Cost of goods sold 10 Gross operating profit 11 Selling, general, and administrative expenses 12 EBITDA 13 Depreciation and amorization 14 EBIT 15 Interest expense 16 Pretax income 17 Income taxes 18 Net income 19 Shares outstanding 20 EPS 21 22 23 Exhibit 2: Lagorge Systems, Inc Balance Sheet (in millions) 2018 $2,215 1,000 1,215 430 785 180 605 130 475 190 $285 60 4.75 24 25 Current Assets 26 Cash and equivalents 27 Receivables 28 Inventories 29 Total current assets 2017 2018 $ 210.00 $ 248.00 S 474.00 $ 513.00 S 520.00 $ 564.00 S 1,204.00 $ 1,325.00 30 31 Noncurrent Assets 32 Property, plant, and equipment 2,501.00 $ 2,850.00 33 Less: Accumulated depreciation $ 604.00 $ 784.00 34 Net property, plant, and equipment $ 1,897.00 $ 2,066.00 35 Other noncurrent assets 100.00 $ 100.00 36 Total noncurrent assets $ 1997.00 $ 2,166.00 37 Total assets 38 39 Current Liabilities $ 3,201.00 $ 3,491.00