Question
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.
- 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.
- Gross margins are expected to improve by 2 percentage points next year. Afterwards no further improvements are expected in gross margins.
- 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.
- Depreciation and amortization are expected to be reduced to $3 million (due to the sales of the assets) and will grow with sales.
- Capital cost allowance is expected to be $5.5 million next year and will grow with sales.
- Interest expense is expected to remain constant for the forecasting period.
- On average, firms in this industry expect cash balances to be about 5% of sales.
- 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.
- Due to product mix changes, inventory will drop to 2% of sales.
- 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.
- The line of credit will vary with sales and remain the same percentage of sales.
- The days taken to pay suppliers will not change.
- 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.
- The long-term debt is paid down at a rate of $3 million per year.
- 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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