It’s 2006. You work for an investment bank, and need to advise a company that is considering acquiring Winnebago. You have been given the Balance Sheet and Income Statement for Winnebago as of August 25, 2006. Winnebago has historically repurchased large amounts of stock with their excess cash flow. These stock repurchases have the same impact as dividends (e.g., in the MM world) so we will assume that Winnebago will pay out all available cash flows above some minimum level required for Net Working Capital in dividends in the future. As we have shown earlier in the semester if Winnebago reinvests these cash flows in projects that earn the return the market requires for Winnebago, the value of the stock will not change, so this assumption is appropriate.

Depreciation expense and investment in fixed assets (Property Plant and Equipment, PP&E) will grow at the same rate as Sales.

Because we assume they pay out all excess cash, Financial Income will be zero in the future.

Tax Rate 35.0%

Use the screenshot to solve questions 1 - 4 below: (Please show your work)

1. Calculate the accounting break-even level of sales for 2008.

2. Assume the company will need to hold Net Working Capital (including cash) equal to 4% of the next year’s sales going forward.  You will also need to project 2012 Sales to calculate the NWC in 2011.

3. Winnebago has no long-term debt (see the 2006 report). Calculate the price of Winnebago stock from the cashflows you calculated above.  Assume the Market Return is expected to be 13.5% and the Risk Free rate is 2.5%.  Assume there are 31,143,000 shares outstanding.  

4. Suppose Winnebago decides to become levered. How would you expect this decision to affect the total value of the firm? Please be specific about the assumptions you make when answering this question.

Sales Variable Costs Gross Profit Fixed Costs Depreciation expense Financial Income Pre Tax Income Income Taxes Net Income + Depreciation Operating Cash Flow Net Investment in Net Working Capital New Investment in Fixed Assets $ Total Cashflow Net Working Capital Actual 2004 1,114,154 942,357 171,797 51,371 9,628 1,436 112,234 41,593 70,641 9,628 $80,269 $716 $ (10,588) $ $70,397 $164,175 Actual 2005 991,974 844,998 146,976 38,723 9,999 2,635 100,889 35,817 65,072 9,999 $75,071 (33,294) $ (9,653) $ $32,124 $197,469 Actual 2006 864,403 748,867 115,536 41,803 10,635 5,097 68,195 23,451 44,744 10,635 $55,379 10,431 $ (4,830) $ $60,980 $187,038 Projected Projected Projected 2007 2008 2009 985,419 827,752 157,667 38,431 12,124 107,112 37,489 69,623 12,124 $81,747 $ (8,000) $ $73,747 $44,935 1,123,378 1,280,651 943,638 1,075,747 179,741 44,935 11,727 123,079 43,078 80,001 11,727 $91,728 $ LA SA $51,226 (13,251) $ $78,477 204,904 51,226 11,343 142,335 49,817 92,518 11,343 $103,861 (21,947) $ $81,914 $58,398 Projected 2010 1,459,942 1,226,351 233,591 58,398 10,971 164,222 57,478 106,744 10,971 $117,715 (36,351) $81,364 $66,573 Projected Projected 2011 2012 1,664,334 1,398,041 266,293 66,573 10,612 189, 108 66,188 122,920 10,612 $133,532 (60,209) $ $73,323 $71,234 $ 1,780,838 1,495,904 284,934 71,234 11,355 202,346 70,821 131,525 11,355 $142,879 (79,967) $62,912