The accounting department of Whitelands, Inc. is forecasting its 2017 income statement and balance sheet at the end of 2016. The department compiled the following assumptions about 2017.

1.Whitelands will generate a 15% operating return on total assets.

2.Inventory, accounts payable, and cost of goods sold will increase by 10% from their 2016 amounts.

3.Sales revenue and accounts receivable will also increase by 10% from their 2017 amounts.

4.The firm will purchase land for $150,000 with funds borrowed from a bank at 10% interest. (The land will be used for a future building site.)

5.Other operating expenses will increase to $650,000, due to a planned employee wage increase.

6.The income tax rate will remain at 40%.

7.Whitelands will pay a dividend of $50,000.

8.The accrued liabilities account will be used to balance the balance sheet.

Required: (1) Use the above information along with the 2016 financial statements (below) to forecast the 2017 income statement and balance sheet (The dollar amounts are in thousands and rounded to the nearest thousand dollar amount).

Income Statements

	2017	2016
Sales revenue		$2,000
Less: Cost of goods sold		1,200
Gross profit		800
Operating expenses:
Depreciation expense		100
Other operating expenses		620
Income from operations		80
Interest (financing) expense		0
Pretax income		80
Income tax expense (40%)		32
Net income		$48

Balance Sheets

	12/31/17	12/31/16
Assets
Cash		$70
Accounts receivable, net		60
Inventory		120
Total current assets		250
Property, Plant and Equipment:
Land		0
Equipment (at cost)		1,000
Less: accumulated depreciation		(500)
Equipment, net of accumulated depreciation		500
Total Assets		$750
Liabilities
Accounts payable		$70
Accrued liabilities		170
Total current liabilities		240
Long-term Liabilities:
Notes payable		0
Total Liabilities		240
Shareholders' Equity
Common stock		400
Retained earnings		110
Total Shareholders' Equity		510
Total Liabilities and Shareholders' Equity		$750

(2) Using the 2017 forecast financial statements, forecast 2017 free cash flows.

(3) Irrespective of your answer to requirement 2 above, determine the present value of the following free cash flows from 2017 through 2019.

Free Cash Flow	Time Value Factor 8% WACC	Present Value at 12/31/16
FCF2017: $28,000	.92593 (n= 1)
FCF2018: 35,000	.85734 (n= 2)
FCF2019: 45,000	.79383 (n= 3)
Total

(4) You forecast Whitelands free cash flow to increase at 2% annual after the forecast horizon ends in 2019. Forecast free cash flows in 2020.

(5) Compute the terminal value of free cash flows. Recall that the weighted average cost of capital is 8% and the assumed growth rate is 2%.

(6) Irrespective of your answer in number 5 above, assume the terminal value is calculated at $3,230,000 Determine the firm value of Whitelands at December 31, 2016 by completing the following table.

Free Cash Flow (per Exhibit 15-5)	Time Value Factor 8% WACC	Present Value at 12/31/16
FCF2017: $28,000	.92593 (n= 1)
FCF2018: 35,000	.85734 (n= 2)
FCF2019: 45,000	.79383 (n= 3)
FCFTV: 765,000	.73503 (n= 4)
Firm Value

(7) Compute the intrinsic common equity at December 31, 2016.

(8) Assume that Whitelands has 20,000 shares of common stock outstanding at December 31, 2016. Determine the intrinsic share price at that date.

(9) Assume that Whitelands was a publicly traded company whose share price was $26.00. Based on your valuation of Whitelands, would you buy stock in the company?

(10) Assume that Whitelands was a privately-held firm instead of a publicly traded company (number 9 above). Whitelands plans to issue 20,000 shares in an initial public offering. The price of stock for the industry in which Whitelands operates trades at 8 times forecast earnings. Determine the selling price for Whitelands stock.