ncome Statement for the Year Ending December 31 (Millions of Dollars) 2016 Net Sales 800.0 Costs (except depreciation) 576.0 Depreciation 60.0 Total operating costs 636.0 Earning before int. & tax 164.0 Less interest 32.0 132.0 Earning before taxes Taxes (40%) 52.8 Net income before pref. div. 79.2 Preferred div. Net income avail. for com. div. 77.9 Common dividends 31.1 Addition to retained earnings 1.4 46.7 Number of shares (in millions) Dividends per share 10 3.11 $ Balance Sheets for December 31 (Millions of Dollars) Assets 2016 Cash 8.0 Short-term investments 20.0 Accounts receivable 80.0 Inventories 160.0 Total current assets 268.0 Net plant and equipment 600.0 Total Assets 868.0 Projected ratios and selected information for the current and projected years are shown below |Inputs Actual 12/31/16 Projected 12/31/18 Projected 12/31/17 Projected Projected 12/31/20 12/31/19 15% 10% Sales Growth Rate 6% 6% Costs/Sales 72% 72% 72% 72% 72% 10% 10% Depreciation/(Net PPE) 10% 1% 10% 1% 10% 1% 1% 1% Cash/Sales |(Acct. Rec.VSales 10% 10% 10% 10% 10% 20% Inventories/Sales 20% 20% 75% 20% 20% (Net PPENSales (Acct. Pay.VSales Accruals/Sales 75% 75% 2% 75% 75% 2% 2% 2% 2% 5% 5% 5% 5% 5% Tax rate 40% 40% 40% 40% 40% 10.5% 10.5% 10.5% 10.5% Weighted average cost of capital (WACC) 10.5%

c. Calculate the return on inves ted capital (ROIC-NOPAT/Total net operating capital) and the growth rate in free cash flow. What is the ROIC in the last year of the forecast? What is the long-term constant growth rate in free cash flow (g is the growth rate in FCF in the last forecast period because all ratios are constant)? Do you think that Hensley's value would increase if it could add growth without reducing its ROIC? (Hint: Growth will add value if the ROIC WACC/1+WACC. Do you think that the company will have a value of operations greater than its total net operating capital? (Hint: Is ROIC WACC/[1+g]?) Actual 12/31/16 Projected 12/31/17 Projected 12/31/18 Projected 12/31/19 Projected 12/31/20 Return on invested capital (ROIC=NOPAT/[Total net operating capital]) Weighted average cost of capital (WACC) WACCI(1+9) WACC/(1+WACC)

Income Statement for the Year Ending December 31 (Millions of Dollars) 2016 Net Sales 800.0 Costs (except depreciation) 576.0 Depreciation 60.0 Total operating costs 636.0 Earning before int. & tax 164.0 Less interest 32.0 132.0 Earning before taxes Taxes (40%) 52.8 Net income before pref. div. 79.2 Preferred div. Net income avail. for com. div. 77.9 Common dividends 31.1 Addition to retained earnings 1.4 46.7 Number of shares (in millions) Dividends per share 10 3.11 $ Balance Sheets for December 31 (Millions of Dollars) Assets Cash Short-term investments Accounts receivable Inventories Total current assets Net plant and equipment 2016 8.0 20.0 80.0 160.0 268.0 600.0 Total Assets 868.0 2016 16.0 40.0 40.0 Liabilities and Equity Accounts Payable Notes payable Accruals Total current liabilities Long-term bonds Preferred stock Common STOCK (Par plus PIC) Retained earnings Common equity Total liabilities and equity 96.0 300.0 15.0 257.0 200.0 457.0 868.0 $ $ Projected ratios and selected information for the current and projected years are shown below. Inputs Actual 12/31/16 Projected 12/31/18 Projected 12/31/19 Projected 12/31/20 Sales Growth Rate Costs/Sales Depreciation/(Net PPE) Cash/Sales (Acct. Rec.Sales Inventories/Sales (Net PPE/Sales (Acct. Pay.Sales Accruals/Sales Tax rate Weighted average cost of capital ( WACC) 72% 10% 1% 10% 20% Projected 12/31/17 15% 72% 10% 1% 10% 20% 75% 10% 72% 10% 1% 10% 20% 75% 2% 5% 40% 10.5% 6% 72% 10% 1% 10% 20% 75% 2% 5% 40% 10.5% 6% 72% 10% 1% 10% 20% 75% 2% 5% 40% 10.5% 75% 2% 2% 5% 40% 10.5% 5% 40% 10.5% c. Calculate the return on invested capital (ROIC=NOPAT/Total net operating capital) and the growth rate in free cash flow. What is the ROIC in the last year of the forecast? What is the long-term constant growth rate in free cash flow (gu is the growth rate in FCF in the last forecast period because all ratios are constant)? Do you think that Hensley's value would increase if it could add growth without reducing its ROIC? (Hint: Growth will add value if the ROIC > WACC/(1+WACC]). Do you think that the company will have a value of operations greater than its total net operating capital? (Hint: Is ROIC > WACC/(1+gJ?) Actual 12/31/16 Projected 12/31/17 Projected 12/31/18 Projected 12/31/19 Projected 12/31/20 Return on invested capital (ROIC=NOPAT/[Total net operating capital]) Weighted average cost of capital (WACC) WACCI(1+9) WACC/(1+WACC) na na na na na na na Income Statement for the Year Ending December 31 (Millions of Dollars) 2016 Net Sales 800.0 Costs (except depreciation) 576.0 Depreciation 60.0 Total operating costs 636.0 Earning before int. & tax 164.0 Less interest 32.0 132.0 Earning before taxes Taxes (40%) 52.8 Net income before pref. div. 79.2 Preferred div. Net income avail. for com. div. 77.9 Common dividends 31.1 Addition to retained earnings 1.4 46.7 Number of shares (in millions) Dividends per share 10 3.11 $ Balance Sheets for December 31 (Millions of Dollars) Assets Cash Short-term investments Accounts receivable Inventories Total current assets Net plant and equipment 2016 8.0 20.0 80.0 160.0 268.0 600.0 Total Assets 868.0 2016 16.0 40.0 40.0 Liabilities and Equity Accounts Payable Notes payable Accruals Total current liabilities Long-term bonds Preferred stock Common STOCK (Par plus PIC) Retained earnings Common equity Total liabilities and equity 96.0 300.0 15.0 257.0 200.0 457.0 868.0 $ $ Projected ratios and selected information for the current and projected years are shown below. Inputs Actual 12/31/16 Projected 12/31/18 Projected 12/31/19 Projected 12/31/20 Sales Growth Rate Costs/Sales Depreciation/(Net PPE) Cash/Sales (Acct. Rec.Sales Inventories/Sales (Net PPE/Sales (Acct. Pay.Sales Accruals/Sales Tax rate Weighted average cost of capital ( WACC) 72% 10% 1% 10% 20% Projected 12/31/17 15% 72% 10% 1% 10% 20% 75% 10% 72% 10% 1% 10% 20% 75% 2% 5% 40% 10.5% 6% 72% 10% 1% 10% 20% 75% 2% 5% 40% 10.5% 6% 72% 10% 1% 10% 20% 75% 2% 5% 40% 10.5% 75% 2% 2% 5% 40% 10.5% 5% 40% 10.5% c. Calculate the return on invested capital (ROIC=NOPAT/Total net operating capital) and the growth rate in free cash flow. What is the ROIC in the last year of the forecast? What is the long-term constant growth rate in free cash flow (gu is the growth rate in FCF in the last forecast period because all ratios are constant)? Do you think that Hensley's value would increase if it could add growth without reducing its ROIC? (Hint: Growth will add value if the ROIC > WACC/(1+WACC]). Do you think that the company will have a value of operations greater than its total net operating capital? (Hint: Is ROIC > WACC/(1+gJ?) Actual 12/31/16 Projected 12/31/17 Projected 12/31/18 Projected 12/31/19 Projected 12/31/20 Return on invested capital (ROIC=NOPAT/[Total net operating capital]) Weighted average cost of capital (WACC) WACCI(1+9) WACC/(1+WACC) na na na na na na na