HINTS!

Insert projected growth rates and ratio figures found on page $420$ first.

Forecast Net Sales, then Operating Assets, then the rest of the Income Statement Items

Don't forget to use parentheses to ensure accurate order of operations.

Be sure to utilize NPV and PV functions in Excel. Found under Formulas, Financial.

Income Statement for the Year Ending December $31($Millions of Dollars$)$

$2021$

Net Sales $$800\mathrm{.}0$

Costs $($except depreciation$)$ $$576\mathrm{.}0$

Depreciation $$60\mathrm{.}0$

Earning before int. & tax $$164\mathrm{.}0$

Interest $$32\mathrm{.}0$

Earning before taxes $$132\mathrm{.}0$

Taxes $(25\%)$ $$33\mathrm{.}0$

Net income before pref. div. $$99\mathrm{.}0$

Preferred div. $$9\mathrm{.}0$

Net income avail. for com. div. $$90\mathrm{.}0$

Common dividends $$30\mathrm{.}0$

Addition to retained earnings $$60\mathrm{.}0$

Number of shares $($in millions$)10$

Dividends per share $$3\mathrm{.}00$

Tax Rate $25\%$

Balance Sheets for December $31($Millions of Dollars$)$

Assets $2021$ Liabilities and Equity $2021$

Cash $$8\mathrm{.}0$ Accounts Payable $$16\mathrm{.}0$

Short$-$term investments $20\mathrm{.}0$ Notes payable $40\mathrm{.}0$

Accounts receivable $80\mathrm{.}0$ Accruals $40\mathrm{.}0$

Inventories $160\mathrm{.}0$ Total current liabilities $$96\mathrm{.}0$

Total current assets $$268\mathrm{.}0$ Long$-$term bonds $$300\mathrm{.}0$

Net plant and equipment $600\mathrm{.}0$ Preferred stock $$100\mathrm{.}0$

Total Assets $$868\mathrm{.}0$ "Common Stock

$($Par plus PIC$)"$ $$257\mathrm{.}0$

Retained earnings $211\mathrm{.}0$

Common equity $$468\mathrm{.}0$

Total liabilities and equity $$868\mathrm{.}0$

Projected ratios and selected information for the current and projected years are shown below.

Inputs Actual Projected Projected Projected Projected

$12/31/202112/31/2212/31/2312/31/2412/31/25$

Sales Growth Rate

Costs$/$Sales $72\%$

Depreciation$/($Net PPE$)10\%$

Cash$/$Sales $1\%$

$($Acct$.$ Rec.$)/$Sales $10\%$

Inventories$/$Sales $20\%$

$($Net PPE$)/$Sales $75\%$

$($Acct$.$ Pay.$)/$Sales $2\%$

Accruals$/$Sales $5\%$

Tax rate $40\%$

Weighted average cost of capital $($WACC$)10\mathrm{.}5\%$

a$.$ Forecast the parts of the income statement and balance sheets necessary to calculate free cash flow.

Partial Income Statement for the Year Ending December $31($Millions of Dollars$)$

Actual Projected Projected Projected Projected

Income Statement Items $12/31/202112/31/2212/31/2312/31/2412/31/25$

Net Sales $$800\mathrm{.}0$

Costs $($except depreciation$)$ $$576\mathrm{.}0$

Depreciation $$60\mathrm{.}0$

Earning before int. & tax $$164\mathrm{.}0$

Partial Balance Sheets for December $31($Millions of Dollars$)$

Actual Projected Projected Projected Projected

Operating Assets $12/31/202112/31/2212/31/2312/31/2412/31/25$

Cash $$8\mathrm{.}0$

Accounts receivable $$80\mathrm{.}0$

Inventories $$160\mathrm{.}0$

Net plant and equipment $$600\mathrm{.}0$

Operating Liabilities

Accounts Payable $$16\mathrm{.}0$

Accruals $$40\mathrm{.}0$

b$.$ Calculate free cash flow for each projected year. Also calculate the growth rates of free cash flow each year to ensure that there is constant growth $($i$.$e$.,$ the same as the constant growth rate in sales$)$ by the end of the forecast period.

Actual Projected Projected Projected Projected

Calculation of FCF $12/31/202112/31/2212/31/2312/31/2412/31/25$

Operating current assets

Operating current liabilities

Net operating working capital

Net PPE

Total net operating capital

NOPAT

Investment in total net operating capital na

Free cash flow na

Growth in FCF na na

Growth in sales

d$.$ Calculate the current value of operations. $($Hint: First calculate the horizon value at the end of the forecast period, which is equal to the value of operations at the end of the forecast period. Assume that the annual growth rate beyond the horizon is equal to the growth rate at the horizon.$)$ How does the current value of operations compare with the current amount of total net operating capital?

Weighted average cost of capital $($WACC$)10\mathrm{.}5\%$

Actual Projected Projected Projected Projected

$12/31/202112/31/202212/31/202312/31/202412/31/2025$

Free cash flow

Long$-$term constant growth in FCF

Horizon value

Present value of horizon value

Present value of forecasted FCF

Value of operations $([$PV of HV$]+[$PV of FCF$])$

Total net operating capital

e$.$ Calculate the price per share of common equity as of $12/31/2021$

Millions except price per share Actual

$12/31/2021$

Value of operations

$+$ Value of short$-$term investments

Total value of company

$$ Total value of all debt

$$ Value of preferred stock

Value of common equity

Divided by number of shares

Price per share

f Sensitivity Analysis: Each change should be made independent of each other. $1.)$ change change constant growth rate from $6\%$ to $4\%.2.)$ change WACC to $9\%.$ Please state what impact $($if any$)$ each of these changes has on price per share?