Use the following ratios and other selected information for the current and projected years to answer the next questions. Please show your work.

Income Statement for the Year Ending December 31 (Millions of Dollars)

2015

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

Earning before taxes

$ 132.0

Taxes (40%)

$ 52.8

Net income before pref. div.

$ 79.2

Preferred div.

$ 1.4

Net income avail. for com. div.

$ 77.9

Common dividends

$ 31.1

Addition to retained earnings

$ 46.7

Number of shares (in millions)

10

Dividends per share

$ 3.11

Balance Sheets for December 31 (Millions of Dollars)

Assets

2015

Liabilities and Equity

2015

Cash

$ 8.0

Accounts Payable

$ 16.0

Short-term investments

20.0

Notes payable

40.0

Accounts receivable

80.0

Accruals

40.0

Inventories

160.0

Total current liabilities

$ 96.0

Total current assets

$ 268.0

Long-term bonds

$ 300.0

Net plant and equipment

600.0

Preferred stock

$ 15.0

Total Assets

$ 868.0

Common Stock (Par plus PIC)

$ 257.0

Retained earnings

200.0

Common equity

$ 457.0

Total liabilities and equity

$ 868.0

Projected ratios and selected information for the current and projected years are shown below.

Inputs

Actual

Projected

Projected

Projected

Projected

12/31/2015

12/31/16

12/31/17

12/31/18

12/31/19

Sales Growth Rate

15%

10%

6%

6%

Costs / Sales

72%

72%

72%

72%

72%

Depreciation / Net PPE

10%

10%

10%

10%

10%

Cash / Sales

1%

1%

1%

1%

1%

Acct. Rec. / Sales

10%

10%

10%

10%

10%

Inventories / Sales

20%

20%

20%

20%

20%

Net PPE / Sales

75%

75%

75%

75%

75%

Acct. Pay. / Sales

2%

2%

2%

2%

2%

Accruals / Sales

5%

5%

5%

5%

5%

Tax rate

40%

40%

40%

40%

40%

Weighted average cost of capital (WACC)

10.5%

10.5%

10.5%

10.5%

10.5%

a. Forecast the parts of the income statement and balance sheets necessary to calculate free cash flow.

Partial Income Statement for the Year Ending December 31 (Millions of Dollars)

Actual

Projected

Projected

Projected

Projected

Income Statement Items

12/31/2015

12/31/16

12/31/17

12/31/18

12/31/19

Net Sales

$800.0

Costs (except depreciation)

$576.0

Depreciation

$60.0

Total operating costs

$636.0

Earning before int. & tax

$164.0

Partial Balance Sheets for December 31 (Millions of Dollars)

Actual

Projected

Projected

Projected

Projected

Operating Assets

12/31/2015

12/31/16

12/31/17

12/31/18

12/31/19

Cash

$8.0

Accounts receivable

$80.0

Inventories

$160.0

Net plant and equipment

$600.0

Operating Liabilities

Accounts Payable

$16.0

Accruals

$40.0

b. Calculate free cash flow for each projected year. Also calculate the growth rates of free cash flow each year to ensure that there is constant growth (i.e., the same as the constant growth rate in sales) by the end of the forecast period.

Actual

Projected

Projected

Projected

Projected

Calculation of FCF

12/31/2015

12/31/16

12/31/17

12/31/18

12/31/19

Operating current assets

Operating current liabilities

Net operating working capital

Net PPE

Total net operating capital

NOPAT

Investment in total net operating capital

na

Free cash flow

na

Growth in FCF

na

na

Growth in sales

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 (gL is the growth rate in FCF in the last forecast period because all ratios are constant)?

Actual

Projected

Projected

Projected

Projected

12/31/2015

12/31/16

12/31/17

12/31/18

12/31/19

Return on invested capital (ROIC=NOPAT/Total net operating capital)

na

d. Calculate the current value of operations. (Hint: First calculate the horizon value at the end of the forecast period, which is equal to the value of operations at the end of the forecast period. Assume that the annual growth rate beyond the horizon is equal to the growth rate at the horizon.) How does the current value of operations compare with the current amount of total net operating capital?

Weighted average cost of capital (WACC)

10.5%

Actual

Projected

Projected

Projected

Projected

12/31/2015

12/31/16

12/31/17

12/31/18

12/31/19

Free cash flow

Long-term constant growth in FCF

Horizon value

Present value of horizon value

Present value of forecasted FCF

Value of operations (PV of HV + PV of FCF)

Total net operating capital

e. Calculate the price per share of common equity as of 12/31/2015

Millions except price per share

Actual

12/31/2015

Value of operations

+ Value of short-term investments

Total value of company

Total value of all debt

Value of preferred stock

Value of common equity

Divided by number of shares

Price per share