N18 A B | C | D E F G H J K L M N 0 P R S T The following relations are given: Current assets fx Pro Forma Example: ABC Corporation 1 2 Sales growth 3 Current assets/Sales 4 Current liabilities/Sales 5 Net fixed assets/Sales 6 Costs of goods sold/Sales 7 Depreciation rate 20% 18% 8% 80% 50% 10% 8 Interest rate on debt 11% 9 Interest paid on cash and marketable securities 7% 10 Tax rate 40% 11 12 13 Year 14 Income statement 15 Sales 16 Costs of goods sold 17 Interest payments on debt 18 Interest earned on cash and marketable securities 19 Depreciation 20 Profit before tax 21 Taxes 22 Profit after tax 23 Dividends 24 Retained earnings 25 0 1 2 3 4 5 Current liabilities Net Fixed Assets Depreciation Fixed Assets at Cost Cash and Marketable Stock Cash Assumed to be 18 percent of end-of-year sales Assumed to be 8 percent of end-of-year sales Assumed to be 80 percent of end-of-year sales 10 percent of the average value of assets on the books during the year Sum of NFA plus accumulated depreciation Average balances of cash and securities marketable securities are assumed to earn 7% The firm neither issues or repurchases stocks over the life time of the pro formas Plug variable Question: In this model, suppose that the firm has 50 million shares and that it decides to pay, in year 1, a dividend per share of 2.40 dollars. In addition, suppose that it wants this dividend per share to grow in subsequent years by 12% per year (all the dollar values are in millions). 1,000 (500) (40) 6 (100) 366 (147) 220 #N/A #N/A a. Incorporate these assumptions into the model. Calculate the resulting income statement, balance sheet, and the free cash flows, and the valuation. #N/A b. Show the sensitivity of thestock price to the long-term growth rate. Let growth rate vary from 0% to 15%, in steps of 1%. #N/A c. Show the sensitivity on a proper graph as well. #N/A #N/A #N/A #N/A (110) #N/A 110 #N/A 26 Balance sheet 27 Cash and marketable securities 28 Current assets 29 Fixed assets 30 At cost 31 Depreciation 32 Net fixed assets 33 Total assets 34 35 Current liabilities 80 36 Debt 400 37 Stock 450 *** 80 #N/A 200 #N/A #N/A 1,100 (300) 800 1,080 #N/A #N/A #N/A #N/A #N/A #N/A 38 Accumulated retained earnings 150 #N/A 39 Total liabilities and equity 1,080 #N/A 40 41 Year 42 Free cash flow calculation 43 Profit after tax 44 Add back depreciation 45 Subtract increase in current assets 0 1 2 3 46 Add back increase in current liabilities 47 Subtract increase in fixed assets at cost 48 Add back after-tax interest on debt 49 Subtract after-tax interest on cash and mkt. securities 50 Free cash flow #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A 51 52 53 Valuing the firm 54 Weighted average cost of capital 55 Long-term free cash flow growth rate 56 57 Year 58 FCF 59 Terminal value 60 Total 61 62 Enterprise value, present value of row 60 63 Add in initial (year 0) cash and mkt. securities 64 Asset value in year 0 65 Subtract out value of firm's debt today 66 Equity value (mil) 67 68 Number of Shares Outstanding (mil) 69 Price per share 70 20% 5%