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Fancy Flowers (FF) Inc. is an importer, grower and wholesaler-distributor of cut flowers. The company is privately owned. You have recently been hired as the

Fancy Flowers (FF) Inc. is an importer, grower and wholesaler-distributor of cut flowers. The company is privately owned.

You have recently been hired as the new CFO. Your assistant has just finished her BBA from Schulich and has estimated the WACC to be approximately 10%.

Valerie Anka is at the end of her operational reorganization plan and needs to know the value of her company.

  1. Sales are expected to grow by 10% next year and 2% per year afterwards. As mentioned, the firm has been restructuring and selling assets. Other revenue represents interest income on the excess cash balances that the firm holds and the sale of various assets as per the operational restructuring.
  2. Gross margins are expected to improve by 2 percentage points next year. Afterwards no further improvements are expected in gross margins.
  3. Selling and general administration expenses are expected to be $5 million next year (the increase is intended to support the increased sales), but for year two and onwards SG & A is expected to grow with sales.
  4. Depreciation and amortization are expected to be reduced to $3 million (due to the sales of the assets) and will grow with sales.
  5. Capital cost allowance is expected to be $5.5 million next year and will grow with sales.
  6. Interest expense is expected to remain constant for the forecasting period.
  7. On average, firms in this industry expect cash balances to be about 5% of sales.
  8. In the first forecast year, the average Accounts Receivable collection period is expected to improve by 3 days once the firm uses credit cards for customer payments.
  9. Due to product mix changes, inventory will drop to 2% of sales.
  10. In the next forecast year, the firm expects to sell $2 million more of their assets. However, net Fixed Asset additions will be $5 million next year and then increase with sales.
  11. The line of credit will vary with sales and remain the same percentage of sales.
  12. The days taken to pay suppliers will not change.
  13. FF has a perpetual debt with a par value of $14 million and a current interest cost of 8 percent. However, interest rates have risen and now the debt would be issued with a 9% interest rate.
  14. The long-term debt is paid down at a rate of $3 million per year.
  15. The firm pays $100,000 in dividends each year.

Required:

Value the equity of FF by estimating and discounting the Free Cash Flows. Below are the current year financial statements.

Balance Sheet for Year Ended November 30, 2020

Assets

Cash

$8,000,000

Accounts Receivable

10,000,000

Inventories

2,000,000

Fixed Assets

36,000,000

Total assets

$56,000,000

Liabilities

Line of Credit

$5,000,000

Accounts payable and accrued liabilities

2,000,000

Long term debt

14,000,000

Total liabilities

21,000,000

Shareholders equity

Capital stock

25,000,000

Retained earnings

10,000,000

Total shareholders equity

35,000,000

Total liabilities and shareholders equity

$56,000,000

Fancy Flowers Inc.

Income Statement for the year ended November 30, 2020

Sales

$80,000,000

Other revenue

1,000,000

Total revenue

81,000,000

Cost of sales and expenses

64,000,000

Selling and administrative

4,000,000

Depreciation and amortization

3,500,000

Interest expense on long-term debt

1,500,000

Total expenses

73,000,000

Earnings before income taxes

8,000,000

Income taxes

2,400,000

Net earnings for the year

$5,600,000

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