stion 1 1 Exhibit A (below) presents the income statement and balance sheet for ThreadCo, a producer of high-quality fabrics and linens used to make expensive clothing which only the truly intelligent segments of society can appreciate. (The clothes are made in Denmark by Hans Christian Andersen and Associates.) The company is expected to increase revenues by 5 percent annually for the next six years (2022-2027). Using the template in Exhibit A, forecast the next six years of income statements for Thread Co. Assume that the next six years' forecast ratios are identical to the ratios for 2021. Forecast depreciation as a percentage of the previous year's PP&E. Forecast interest expense as a percentage of the previous year's debt. Next, forecast each balance sheet item as a function of revenues, except inventory and accounts payable, which should be forecasted as a function of cost of sales. Assume equity investments remain the same as the current year. Assume the firm maintains the same dividend payout ratio as the current year. EXHIBIT A Thread Co: Consolidated Financial Statements $ million Income statement 2020 2022 2023 2024 2025 2026 2027 2021 1,595.0 Revenues Cost of sales (1,116.5) welling costs (239.3) (87.0) epreciation perating profit 152.3 (15.0) Cerest expense nings before taxes es 1,450.0 (1,087.5) (217.5) (27.6) 117.4 (15.0) 102.4 (19.5) 137.3 (27.5) EXHIBITA Thread Co: Consolidated Financial Statements $ million Income statement 2020 1,450.0 Revenues Cost of sales (1,087.5) (217.5) Selling costs Depreciation Operating profit (27.6) 117.4 (15.0) Interest expense Earnings before taxes 102.4 Taxes (19.5) Net income 82.9 Dividends 9.0 lance sheet 2020 sets orking cash 29.0 cess cash and marketable securities 44.2 counts receivable 130.5 entory 152.3 rent assets 356.0 2021 1,595.0 (1,116.5) (239.3) (87.0) 152.3 (15.0) 137.3 (27.5) 109.8 17.0 2021 31.9 108.8 118.8 133.7 393.2 2022 2022 2023 2023 2024 2024 2025 2025 2026 2026 2027 2027 Balance sheet Assets Working cash Excess cash and marketable securities Accounts receivable Inventory Current assets Property, plant and equipment Equity Investments Total assets Assets except excess cash Liabilities and equity Accounts payable Short-term debt Accrued expenses Current liabilities Long-term debt Newly issued debt Common stock Retained earnings Liabilities and equity Liabilities and equity except newly issued debt 2020 29.0 44.2 130.5 152.3 356.0 725.0 320.0 1,401.0 123.8 90.0 88.0 301.8 210.0 150.0 739.2 1,401.0 0.0 2021 31.9 108.8 118.8 133.7 393.2 797.5 320.0 1,510.7 133.7 90.0 95.0 318.7 210.0 0.0 150.0 832.0 1,510.7 2022 2023 2024 2025 2026 2027 b Calculate NOPLAT, invested capital, ROIC, and Free Cash Flows (FCF) for each year based on your forecast from part a (above). To keep things simple, calculate ROIC using the amount of invested capital held at the end of the previous period. (In other words, don't average the previous and current year's invested capital.) 2020 2022 2021 2023 2024 2025 2026 NOPLAT Operating current assets Operating current liabilities OWC PP&E Invested capital (note there is no goodwill) ROIC (using previous year's IC) Calculation of free cash flows Free cash flows (FCFS) + 2027 QUERIVIE Using the next five years of free cash flows computed in Question 1, an estimated continuing value at the end of 2026, and the weighted average cost of capital (WACC) computed in Question 2, estimate Thread Co's enterprise value. Use the key value driver formula to estimate your continuing value. Assume long-term growth rate of 3 percent and a return on new invested capital (RONIC) of 12 percent. $ million Year 2022 2023 2024 2025 2026 Free cash flow (FCF) Discounted FCF Continuing value PV of explicit FCFs PV of continuing value PV of operations Midyear adjustment PV of nonoperating assets Enterprise value b What is the intrinsic equity value for Thread Co? What is the value per share? Debt + b What is the intrinsic equity value for Thread Co? What is the value per share? Debt Equity value Value per share, $ WACC, % Long-term growth rate, % RONIC, % 3.00% 12.00% Is your model output (i.e., estimated value per share, above) within the limits recommended by the text? (This is a 'yes' or 'no' question.) Your answer: + a Refer back to your answers for question 1. Complete a decomposition of the firm's ROIC for 2021 using the spaces provided. Gross Margin 2021 Operating Margin Selling cost/sales Pre-tax ROIC 2021 Depreciation 2021 Op WC/Sales 2021 Fixed Assets/Sales ROIC 2021 Tax rate 2021 Average Capital Turn 2021 2021 2021 2021 stion 1 1 Exhibit A (below) presents the income statement and balance sheet for ThreadCo, a producer of high-quality fabrics and linens used to make expensive clothing which only the truly intelligent segments of society can appreciate. (The clothes are made in Denmark by Hans Christian Andersen and Associates.) The company is expected to increase revenues by 5 percent annually for the next six years (2022-2027). Using the template in Exhibit A, forecast the next six years of income statements for Thread Co. Assume that the next six years' forecast ratios are identical to the ratios for 2021. Forecast depreciation as a percentage of the previous year's PP&E. Forecast interest expense as a percentage of the previous year's debt. Next, forecast each balance sheet item as a function of revenues, except inventory and accounts payable, which should be forecasted as a function of cost of sales. Assume equity investments remain the same as the current year. Assume the firm maintains the same dividend payout ratio as the current year. EXHIBIT A Thread Co: Consolidated Financial Statements $ million Income statement 2020 2022 2023 2024 2025 2026 2027 2021 1,595.0 Revenues Cost of sales (1,116.5) welling costs (239.3) (87.0) epreciation perating profit 152.3 (15.0) Cerest expense nings before taxes es 1,450.0 (1,087.5) (217.5) (27.6) 117.4 (15.0) 102.4 (19.5) 137.3 (27.5) EXHIBITA Thread Co: Consolidated Financial Statements $ million Income statement 2020 1,450.0 Revenues Cost of sales (1,087.5) (217.5) Selling costs Depreciation Operating profit (27.6) 117.4 (15.0) Interest expense Earnings before taxes 102.4 Taxes (19.5) Net income 82.9 Dividends 9.0 lance sheet 2020 sets orking cash 29.0 cess cash and marketable securities 44.2 counts receivable 130.5 entory 152.3 rent assets 356.0 2021 1,595.0 (1,116.5) (239.3) (87.0) 152.3 (15.0) 137.3 (27.5) 109.8 17.0 2021 31.9 108.8 118.8 133.7 393.2 2022 2022 2023 2023 2024 2024 2025 2025 2026 2026 2027 2027 Balance sheet Assets Working cash Excess cash and marketable securities Accounts receivable Inventory Current assets Property, plant and equipment Equity Investments Total assets Assets except excess cash Liabilities and equity Accounts payable Short-term debt Accrued expenses Current liabilities Long-term debt Newly issued debt Common stock Retained earnings Liabilities and equity Liabilities and equity except newly issued debt 2020 29.0 44.2 130.5 152.3 356.0 725.0 320.0 1,401.0 123.8 90.0 88.0 301.8 210.0 150.0 739.2 1,401.0 0.0 2021 31.9 108.8 118.8 133.7 393.2 797.5 320.0 1,510.7 133.7 90.0 95.0 318.7 210.0 0.0 150.0 832.0 1,510.7 2022 2023 2024 2025 2026 2027 b Calculate NOPLAT, invested capital, ROIC, and Free Cash Flows (FCF) for each year based on your forecast from part a (above). To keep things simple, calculate ROIC using the amount of invested capital held at the end of the previous period. (In other words, don't average the previous and current year's invested capital.) 2020 2022 2021 2023 2024 2025 2026 NOPLAT Operating current assets Operating current liabilities OWC PP&E Invested capital (note there is no goodwill) ROIC (using previous year's IC) Calculation of free cash flows Free cash flows (FCFS) + 2027 QUERIVIE Using the next five years of free cash flows computed in Question 1, an estimated continuing value at the end of 2026, and the weighted average cost of capital (WACC) computed in Question 2, estimate Thread Co's enterprise value. Use the key value driver formula to estimate your continuing value. Assume long-term growth rate of 3 percent and a return on new invested capital (RONIC) of 12 percent. $ million Year 2022 2023 2024 2025 2026 Free cash flow (FCF) Discounted FCF Continuing value PV of explicit FCFs PV of continuing value PV of operations Midyear adjustment PV of nonoperating assets Enterprise value b What is the intrinsic equity value for Thread Co? What is the value per share? Debt + b What is the intrinsic equity value for Thread Co? What is the value per share? Debt Equity value Value per share, $ WACC, % Long-term growth rate, % RONIC, % 3.00% 12.00% Is your model output (i.e., estimated value per share, above) within the limits recommended by the text? (This is a 'yes' or 'no' question.) Your answer: + a Refer back to your answers for question 1. Complete a decomposition of the firm's ROIC for 2021 using the spaces provided. Gross Margin 2021 Operating Margin Selling cost/sales Pre-tax ROIC 2021 Depreciation 2021 Op WC/Sales 2021 Fixed Assets/Sales ROIC 2021 Tax rate 2021 Average Capital Turn 2021 2021 2021 2021