The Trinity Corporation has been in operation for one full year (2019). Financial statements are shown below. Sales are expected to grow of a 30 percent animal rale for each of the next three years (2020 2021 and 222) 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 fie, be semi-fixed) for the next three years before again growing a 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 nel fixed assets (since ne fixed assets are expected to grow of the same rule 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 value investors believe that 35 percent is an appropriate werghted average cost of capital (WACC) discount rate wil the firm reaches its long run or perpety growth rate. Ar that rime, it will have surved, 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 equiry would be worth In addition, apply the free cash to equity (FCFE) method, beginning with a reguired rate of return on equity of 40%, before declining to an a nalized 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 $20.000 -10.000 Cost of goods sold Gross profit Operating expenses Depreciation -7.500 -400 Taxes (40%) Net income -100 2.000 820 $1.200 Trinity Corporation Balance Sheet as of December 31, 2019 (Thousands of Dollars) $ 1.000 SI SOO 2000 Cash Accounts receivable Inventories Total current assets Gross fixed assets Accumulated depreciation Net fixed assets Total assets $.400 Accounts payable Accrued liabilities Total current liabilities Long-term debt Common stock Retained earnings Total equity Total liabilities & equity SLCLO S10.000 S10.000 Excel File Edit View Insert Format Tools Data Window Help Semest Home Formulas Data 10 -A- A Review = = Insert Cut Copy Format x View = 2). Page Layout Arial BIU. fx B So Wrap Text - Merge & Center Paste N93 C D E F G H I 1 Trinity Corp. Valuation 3 Percent Sales increase Actual Projected 30.0% 30.0% 30.0% 70% 2020 2021 2022 2023 2019 Sales 100.0% -50.0% 50.0% 2019 20000 -10000 10000 -7500 2.0% 2100 0.5% -100 2000 -800 1200 1000 5 Income Statements 8 Sales 7 Cost of goods sold 8 Gross proft 9 Operating expenses 10 Depreciation 11 EBIT 12 Interest 13 EBT 14 Taxes (40%) 15 Net Income 16 Balance Sheets 17 Cash 18 Marketable Securities 19 Accounts receivable 20 Inventories 21 Totalement assets 22 Gross foxed assets 23 Accumulated depreciation 24 Not foxed assets 25 Total assets 26 Accounts payable 27 Accrued abilities 28 Total current abities 29 Long-ton debt 30 Cormon stock 31 Retained eamings 32 Total equity 33 Total liabilities & equity 2000 2000 10.0% 25.0% 2020 2021 2022 35 Work Sheet for Estimating Free Cash Flows to Firm: 2019 37 Income Statement Flows: 38 NOPAT 39 Depreciation Sheet1 Sheet2 Sheet3 + Ready MacBook DB0- Semester Project.FIN 4310.Spring Home Insert Page Layout Formulas Data Review View Arial 10 A AY = = = D. o Wrap Text B I U . L . S.A . - Merge & Center N93 x fx E F G 2020 2021 2022 2023 35 Work Sheet for Estimating Free Cash Flows to Firm: 2019 37 Income Statement Flows: 38 NOPAT 39 Depreciation 1000 2000 41 Required Net Working Capital: 42 Required Cash 43 Accounts Receivable 44 Inventories 45 Accounts payable 46 Accrued liabilities 47 Required NWC 48 Increase in Required NWC 49 50 Capital Expenditures (CAPEX): 51 Net foxed assets 52 Increase in net foed assets 53 Depreciation 54 Increase in gross foxed assets 2000 - 1500 -1000 2500 5000 58 Free Cash Flows to Firm: 2019 2020 2021 2022 2023 60 NOPAT 61 Plus Depreciation 62 Less: Increase in Required NWC 63 Less: CAPEX incin GFA) 64 Annual Free Cash Flows 65 Teminal Value (18% discrate) 66 Total Free Cash Flows to Enterprise 67 PV of Operations (35% discrate) 68 Plus: Marketable Securities 69 Market value of Fim 70 Less Long-tem Debt 71 Market Value of Equity 72 Per Share Value 1 milion shares) 75 Free Cash Flows to Equity 77 Net income 2019 2020 2021 2022 2023 Sheet Sheet2 Sheet3 + Ready MacBook Semester Project.FIN 4310.Spring Home Insert Page Layout Formulas Data Review View A. x Arial. . 10 . A- Ay = = = Et Wrap Text Paste BIU.L.S.A. 3333 Merge & Center N93x v fx 53 Depreciation 54 Increase in gross foxed assets 2019 2020 2021 2022 2023 58 Free Cash Flows to Firm: 59 60 NOPAT 61 Plus: Depreciation 62 Less: Increase in Required NWC 63 Less: CAPEX (Inc in GFA) 64 Annual Free Cash Flows 65 Terminal Value (18% discrate) 66 Total Free Cash Flows to Enterprise 67 PV of Operations (35% discrate) 68 Plus: Marketable Securities 69 Market Value of Firm 70 Less: Long-term Debt 71 Market Value ofequity 72 Per Share Value 1 milion shares) 75 Free Cash Flows to Equity 2020 2021 2022 2023 77 Net Income 78 Plus: Depreciation 79 Less: Increase in Required NWC 80 Loss CAPEX (inc in GFA) 81 Plus Not increase in debt 82 Annual Free Cash Flows 83 Teminal Value (20% discrate) 84 Total Free Cash Flows to Equity 85 PV of Operations (40% disc rate) 86 Per Share Value 1 milion shares) Sheet1 Sheet2 Sheets + Ready MacBook The Trinity Corporation has been in operation for one full year (2019). Financial statements are shown below. Sales are expected to grow of a 30 percent animal rale for each of the next three years (2020 2021 and 222) 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 fie, be semi-fixed) for the next three years before again growing a 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 nel fixed assets (since ne fixed assets are expected to grow of the same rule 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 value investors believe that 35 percent is an appropriate werghted average cost of capital (WACC) discount rate wil the firm reaches its long run or perpety growth rate. Ar that rime, it will have surved, 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 equiry would be worth In addition, apply the free cash to equity (FCFE) method, beginning with a reguired rate of return on equity of 40%, before declining to an a nalized 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 $20.000 -10.000 Cost of goods sold Gross profit Operating expenses Depreciation -7.500 -400 Taxes (40%) Net income -100 2.000 820 $1.200 Trinity Corporation Balance Sheet as of December 31, 2019 (Thousands of Dollars) $ 1.000 SI SOO 2000 Cash Accounts receivable Inventories Total current assets Gross fixed assets Accumulated depreciation Net fixed assets Total assets $.400 Accounts payable Accrued liabilities Total current liabilities Long-term debt Common stock Retained earnings Total equity Total liabilities & equity SLCLO S10.000 S10.000 Excel File Edit View Insert Format Tools Data Window Help Semest Home Formulas Data 10 -A- A Review = = Insert Cut Copy Format x View = 2). Page Layout Arial BIU. fx B So Wrap Text - Merge & Center Paste N93 C D E F G H I 1 Trinity Corp. Valuation 3 Percent Sales increase Actual Projected 30.0% 30.0% 30.0% 70% 2020 2021 2022 2023 2019 Sales 100.0% -50.0% 50.0% 2019 20000 -10000 10000 -7500 2.0% 2100 0.5% -100 2000 -800 1200 1000 5 Income Statements 8 Sales 7 Cost of goods sold 8 Gross proft 9 Operating expenses 10 Depreciation 11 EBIT 12 Interest 13 EBT 14 Taxes (40%) 15 Net Income 16 Balance Sheets 17 Cash 18 Marketable Securities 19 Accounts receivable 20 Inventories 21 Totalement assets 22 Gross foxed assets 23 Accumulated depreciation 24 Not foxed assets 25 Total assets 26 Accounts payable 27 Accrued abilities 28 Total current abities 29 Long-ton debt 30 Cormon stock 31 Retained eamings 32 Total equity 33 Total liabilities & equity 2000 2000 10.0% 25.0% 2020 2021 2022 35 Work Sheet for Estimating Free Cash Flows to Firm: 2019 37 Income Statement Flows: 38 NOPAT 39 Depreciation Sheet1 Sheet2 Sheet3 + Ready MacBook DB0- Semester Project.FIN 4310.Spring Home Insert Page Layout Formulas Data Review View Arial 10 A AY = = = D. o Wrap Text B I U . L . S.A . - Merge & Center N93 x fx E F G 2020 2021 2022 2023 35 Work Sheet for Estimating Free Cash Flows to Firm: 2019 37 Income Statement Flows: 38 NOPAT 39 Depreciation 1000 2000 41 Required Net Working Capital: 42 Required Cash 43 Accounts Receivable 44 Inventories 45 Accounts payable 46 Accrued liabilities 47 Required NWC 48 Increase in Required NWC 49 50 Capital Expenditures (CAPEX): 51 Net foxed assets 52 Increase in net foed assets 53 Depreciation 54 Increase in gross foxed assets 2000 - 1500 -1000 2500 5000 58 Free Cash Flows to Firm: 2019 2020 2021 2022 2023 60 NOPAT 61 Plus Depreciation 62 Less: Increase in Required NWC 63 Less: CAPEX incin GFA) 64 Annual Free Cash Flows 65 Teminal Value (18% discrate) 66 Total Free Cash Flows to Enterprise 67 PV of Operations (35% discrate) 68 Plus: Marketable Securities 69 Market value of Fim 70 Less Long-tem Debt 71 Market Value of Equity 72 Per Share Value 1 milion shares) 75 Free Cash Flows to Equity 77 Net income 2019 2020 2021 2022 2023 Sheet Sheet2 Sheet3 + Ready MacBook Semester Project.FIN 4310.Spring Home Insert Page Layout Formulas Data Review View A. x Arial. . 10 . A- Ay = = = Et Wrap Text Paste BIU.L.S.A. 3333 Merge & Center N93x v fx 53 Depreciation 54 Increase in gross foxed assets 2019 2020 2021 2022 2023 58 Free Cash Flows to Firm: 59 60 NOPAT 61 Plus: Depreciation 62 Less: Increase in Required NWC 63 Less: CAPEX (Inc in GFA) 64 Annual Free Cash Flows 65 Terminal Value (18% discrate) 66 Total Free Cash Flows to Enterprise 67 PV of Operations (35% discrate) 68 Plus: Marketable Securities 69 Market Value of Firm 70 Less: Long-term Debt 71 Market Value ofequity 72 Per Share Value 1 milion shares) 75 Free Cash Flows to Equity 2020 2021 2022 2023 77 Net Income 78 Plus: Depreciation 79 Less: Increase in Required NWC 80 Loss CAPEX (inc in GFA) 81 Plus Not increase in debt 82 Annual Free Cash Flows 83 Teminal Value (20% discrate) 84 Total Free Cash Flows to Equity 85 PV of Operations (40% disc rate) 86 Per Share Value 1 milion shares) Sheet1 Sheet2 Sheets + Ready MacBook