Follow the steps below to calculate the FCFF with forecasting the Free Cash Flow from 2016-

2021:

(1) Calculate the Operating Income from 2016-2021. Operating Income/Sales rate for the

projection of the next five years was computed from the rates given in 2013-2015. This

result is different than the estimates for post-RMT Leidos, which listed this ratio as 9.4%

in case exhibit 7 for 2016.

(2) Calculate the income tax rate from 2016-2021. The income tax expense rate was computed

using the average tax rate from 2013 to 2015.

(3) Calculate PP&E from 2016-2021. The PP&E rates were calculated from the historical

percent of sales in 2014 and 2015.

(4) Calculate the net working capital from 2016-2021. The net working capital to sales ratio

was calculated, as the average of 2014 and 2015. Working capital was defined as current

assets accounts payable.

(5) Finally, calculate the firm value and the equity value:

a) The IS&GS division cash flows were discounted using Leidos discount rate

calculated usingcomparable betas.

b) Use the operating income/sales rate calculated in

Year 2013 2014 2015

Sales

Average:

Operating

Income/Sales

Tax

Expense/EBIT

Net

PP&E/Sales

NWC/Sales

FORECASTING 2016 2017 2018 2019 2020 2021

Sales

Operating

Income

Tax Expense

NOPAT

PP&E

Change in PP&E

NWC

Change in NWC

FCF

Terminal Value

PV of FCF &

Terminal Value

NPV

Cash

Firm Value

Equity Value

(6) Now use 9.4% as the operating income/sales rate from Wells Fargo. Recalculate firm value

and equity value.

7. It looks like someone holding Lockheed stock could make an immediate 10% profit, exchanging

$100 in Lockheed stock for $111 in Leidos stock. What is the risk?