The Trinity Corporation has been in operation for one full year (2019). Financial statements are shown below. Sales are expected to grow at a 30 percent annual rate for each of the next three years (2020 2021 and 2022) before slowing down to a long-term growth rate of 7 percent in 2023 and a constant long-term growth rate of 3%. The cost of goods sold is expected to vary with sales. Operating expenses are expected to grow at 75% of the sales growth rate (ie, be semi.fixed) for the next three years before again growing at the same rate as sales beginning in 2023. Interest expense is expected to grow with sales. Depreciation can be forecasted either as a percentage of sales or as a percentage of net fixed assets (since net fixed assets are expected to grow at the same rate as sales growth). Individual asset accounts are expected to grow at the same rate as sales. Accounts payable and accrued liabilities are also expected to grow with sales. Because Trinity is relative new corporation, management and venture investors believe that 35 percent is an appropriate weighted average cost of capital (WACC) discount rate until the firm reaches its long run or perpetuity growth rate. At that time, it will have survived, recapitalized its capital structure, and will become a more typical firm in the industry with an estimated WACC of 18 percent. Calculate Trinity's firm value (FCFF) as of the end of 2019. Also indicate what the equity would be worth In addition, apply the free cash te equity (FCFE) method, beginning with a required rate of return on equity of 40%, before declining to an annualized rate of 20% during the stable growth period The purpose of this method will also be to estimate the market value of Trinity's equity. Trinity Corporation Income Statement for December 31, 2019 (Thousands of Dollars) Sales Cost of poods sold Gross profit Operating expenses Depreciation FRIT Interest ERT Taxes (40%) Net income $20.000 -10.000 10,000 -7.500 -400 2,100 -100 2.000 -800 $1,200 Trinity Corporation Balance Sheet as of December 31, 2019 Thousands of Dollars) 1.00 2.500 Cash Accounts receivable Investories Total current assets Grossfied assets Accumulated depreciation Netfied assets Total assets $ 1.000 2.000 2.000 5.000 5.400 400 5.000 $10.000 Accounts payable Accued liabilities Total current liabilities Long-term deht Common stock Retained carings Total equity Total liabilities & equity 1.200 $10,000 The Trinity Corporation has been in operation for one full year (2019). Financial statements are shown below. Sales are expected to grow at a 30 percent annual rate for each of the next three years (2020 2021 and 2022) before slowing down to a long-term growth rate of 7 percent in 2023 and a constant long-term growth rate of 3%. The cost of goods sold is expected to vary with sales. Operating expenses are expected to grow at 75% of the sales growth rate (ie, be semi.fixed) for the next three years before again growing at the same rate as sales beginning in 2023. Interest expense is expected to grow with sales. Depreciation can be forecasted either as a percentage of sales or as a percentage of net fixed assets (since net fixed assets are expected to grow at the same rate as sales growth). Individual asset accounts are expected to grow at the same rate as sales. Accounts payable and accrued liabilities are also expected to grow with sales. Because Trinity is relative new corporation, management and venture investors believe that 35 percent is an appropriate weighted average cost of capital (WACC) discount rate until the firm reaches its long run or perpetuity growth rate. At that time, it will have survived, recapitalized its capital structure, and will become a more typical firm in the industry with an estimated WACC of 18 percent. Calculate Trinity's firm value (FCFF) as of the end of 2019. Also indicate what the equity would be worth In addition, apply the free cash te equity (FCFE) method, beginning with a required rate of return on equity of 40%, before declining to an annualized rate of 20% during the stable growth period The purpose of this method will also be to estimate the market value of Trinity's equity. Trinity Corporation Income Statement for December 31, 2019 (Thousands of Dollars) Sales Cost of poods sold Gross profit Operating expenses Depreciation FRIT Interest ERT Taxes (40%) Net income $20.000 -10.000 10,000 -7.500 -400 2,100 -100 2.000 -800 $1,200 Trinity Corporation Balance Sheet as of December 31, 2019 Thousands of Dollars) 1.00 2.500 Cash Accounts receivable Investories Total current assets Grossfied assets Accumulated depreciation Netfied assets Total assets $ 1.000 2.000 2.000 5.000 5.400 400 5.000 $10.000 Accounts payable Accued liabilities Total current liabilities Long-term deht Common stock Retained carings Total equity Total liabilities & equity 1.200 $10,000
