Free cash flow. We provide income statements, statements of retained earnings, and balance sheets for Tim Schlindwein & Company in Exhibit P3.1. Assume all of the cash flows occur at the year-ends, including capital expenditures and any financing transactions. The company distributes all equity free cash flows to equityholders in the form of dividends; in other words, it does not hold any excess cash. Its income tax rate is 30% on taxable income up to $2,000 and 40% on all additional taxable income. The interest rate the company pays on debt is 8%, and its preferred stock dividend rate is 9%. The company has no sales or retirements of property, plant, or equipment during the priod covered by the exhibit. The cash line represents required cash. (6') \ \ Exhibit P3.1 \ "Tim Schlindwein & Company\ Income Statement and Balance Sheet Forecasts" \ Actual Actual Forecast Forecast Forecast Forecast\ Year -1 Year 0 Year 1 Year 2 Year 3 Year 4\ Income Statement: \ Revenue $7,960 $8,119 $8,931 $9,556 $9,939 $10,137\ Operating Expenses -5,094 -5,196 -5,537 -5,256 -5,466 -5,576\ Depreciation Expense -889 -1,005 -1,207 -1,411 -1,610 -1,642\ Earnings Before Interest and Taxes $1,977 $1,918 $2,187 $2,889 $2,862 $2,919\ Interest Expense 0 -400 -392 -360 -288 -208\ Income Before Taxes $1,977 $1,518 $1,795 $2,529 $2,574 $2,711\ Income Tax Expense -593 -455 -538 -812 -830 -885\ Net Income $1,384 $1,062 $1,256 $1,718 $1,745 $1,827\ \ Balance Sheet: \ Cash $80 $81 $89 $96 $99 $101\ Net Operating Working Capital 318 325 357 382 398 405\ Property, Plant & Equipment (Net) 8,119 8,931 9,556 9,939 10,137 10,340\ Total Assets $8,517 $9,337 $10,003 $10,416 $10,634 $10,847\ \ Debt $5,000 $4,900 $4,500 $3,600 $2,600 $2,652\ Preferred Stock 1,000 1,050 1,170 1,430 1,740 1,775\ Equity 2,517 3,387 4,333 5,386 6,294 6,420\ Total Liabilities and Equities $8,517 $9,337 $10,003 $10,416 $10,634 $10,847\ \ Statement of Retained Earnings: \ Beginning of Year Balance $701 $1,517 $2,387 $3,333 $4,386 $5,294\ Net Income 1,384 1,062 1,256 1,718 1,745 1,827\ Preferred Stock Dividends -68 -90 -95 -105 -129 -157\ Common Equity Dividends -500 -102 -216 -559 -708 -1,544\ End of Year Balance $1,517 $2,387 $3,333 $4,386 $5,294 $5,420\ \ Income tax information: \ Income tax cutoff $2,000 \ Income tax rate below cutoff 30% \ Income tax rate above cutoff 40% \ \ Estimate the company's free cash flow and equity free cash flow in each year below (6'). \ \ " Tim Schlindwein & Company\ Free Cash Flow and Equity Free Cash Flow Forecasts" \ Actual Forecast Forecast Forecast Forecast\ Year 0 Year 1 Year 2 Year 3 Year 4\ \ Earnings Before Interest and Taxes (EBIT) \ - Income Taxes Paid on EBIT \ Earnings Before Interest and After Taxes \ + Depreciation Expense \ - Change in Required Cash \ - Change in Net Operating Working Capital \ - Capital Expenditures \ Unlevered Free Cash Flow \ - Interest Paid in Cash \ + Interest Tax Shield \ - Preferred Stock Dividends \ + Change in debt financing \ + Change in preferred stock financing \ Equity Free Cash Flow