Using the actual financial statement in the firm represented in the attached table do a valuation using its value drivers. Assume a short-term growth rate of 6% and a long-term growth rate of 5%. Use 10% as the required return.

Table 6-1 Better Buys Inc. Income Statement Panel a. Historical Income Statement 2008 2009 2010 Revenues $33,125,000 $35,112,500 $37,219,250 Cost of goods sold ($21,696,875) ($22,472,000) ($24,192,513) Gross profit $11,428,125 $12,640,500 $13,026,737 Operating expenses Fixed cash operating expenses ($2,000,000) ($2,000,000) ($2,000,000) Variable cash operating expenses ($5,300,000) ($5,618,000) ($6,029,519) Depreciation expense ($1,343,750) ($1,424,375) ($1,509,838) Net operating income $2,784,375 $3,598,125 $3,487,380 Nonoperating income $300,000 $300,000 $300,000 Earnings before interest and taxes $3,084,375 $3,898,125 $3,787,380 Interest expense ($974,438) ($860,855) ($888,841) Earnings before taxes $2,109,938 $3,037,270 $2,898,539 Taxes ($843,975) ($1,214,908) ($1,159,416) Net income $1,265,963 $1,822,362 $1,739,123 Dividends paid ($200,000) ($200,000) ($200,000) Addition to retained earnings $1,065,963 $1,622,362 $1,539,123 Table 6-2 Panel a. Historical Balance Sheets Cash and marketable securities Accounts receivable Inventories Current assets Net property, plant, & equipment Investments Total Accounts payable Short-term debt Current liabilities Long-term liabilities Total liabilities Deferred income taxes Common stock Retained earning Total owners' equity Total liabilities and owners' equity Better Buys Inc. Balance Sheets 2007 $624,000 $6,651,500 $10,001,000 $17,276,500 $13,437,500 $3,000,000 $33,714,000 $7,812,500 $6,875,000 $14,687,500 $4,603,061 $19,290,561 $329,749 $10,000,000 $4,093,690 $14,093,690 $33,714,000 2008 $650,000 $7,102,000 $10,643,000 $18,395,000 $14,243,750 $3,000,000 $35,638,750 $8,281,250 $7,287,500 $15,568,750 $4,563,719 $20,132,469 $346,629 $10,000,000 $5,159,653 $15,159,653 $35,638,750 2009 $702,500 $7,408,738 $11,938,250 $20,049,488 $15,098,375 $3,000,000 $38,147,863 $8,778,125 $7,724,750 $16,502,875 $4,504,195 $21,007,070 $358,778 $10,000,000 $6,782,015 $16,782,015 $38,147,863 2010 $744,385 $8,113,797 $12,282,353 $21,140,534 $16,004,278 $3,000,000 $40,144,812 $8,800,100 $8,188,235 $16,988,335 $4,464,966 $21,453,301 $370,372 $10,000,000 $8,321,139 $18,321,139 $40,144,812 Table 6-1 Better Buys Inc. Income Statement Panel a. Historical Income Statement 2008 2009 Revenues 33,125,000 35,112,500 Cost of goods sold -21,696,875 -22,472,000 Gross profit 11,428,125 12,640,500 Operating expenses Fixed cash operating expenses -2,000,000 -2,000,000 Variable cash operating expenses -5,300,000 -5,618,000 Depreciation expense -1,343,750 -1,424,375 Net operating income 2,784,375 3,598,125 Nonoperating income 300,000 300,000 Earnings before interest and taxes 3,084,375 3,898,125 Interest expense -974,438 -860,855 Earnings before taxes 2,109,937 3,037,270 Taxes (40%) #VALUE! #VALUE! Net income #VALUE! #VALUE! Dividends paid -200,000 -200,000 Addition to retained earnings #VALUE! #VALUE! Panel b. Common Size Income Statements Revenues 100.0% 100.0% Cost of goods sold -65.5% -64.0% Gross profit 34.5% 36.0% Operating expenses 0.0% 0.0% Fixed cash operating expenses -6.0% -5.7% Variable cash operating expenses -16.0% -16.0% Depreciation expense -4.1% -4.1% Net operating income 8.4% 10.2% Nonoperating income 0.9% 0.9% Earnings before interest and taxes 9.3% 11.1% Interest expense -2.9% -2.5% Earnings before taxes 6.4% 8.7% Taxes (40%) #VALUE! #VALUE! Net income #VALUE! #VALUE! 2010 37,219,250 -24,192,513 13,026,737 -2,000,000 -6,029,519 -1,509,838 3,487,380 300,000 3,787,380 -888,841 2,898,539 #VALUE! #VALUE! -200,000 #VALUE! 100.0% -65.0% 35.0% 0.0% -5.4% -16.2% -4.1% 9.4% 0.8% 10.2% -2.4% 7.8% #VALUE! #VALUE! Table 6-2 Panel a. Historical Balance Sheets Cash and marketable securities Accounts receivable Inventories Current assets Net property, plant, & equipment Investments Total Accounts payable Short-term debt Current liabilities Long-term liabilities Total liabilities Deferred income taxes Common stock Retained earning Total owners' equity Total liabilities and owners' equity Better Buys Inc. Balance Sheets 2008 2009 650,000 702,500 7,102,000 7,408,738 10,643,000 11,938,250 18,395,000 20,049,488 14,243,750 15,098,375 3,000,000 3,000,000 35,638,750 38,147,863 8,281,250 8,778,125 7,287,500 7,724,750 15,568,750 16,502,875 4,563,719 4,504,195 20,132,469 21,007,070 346,629 358,778 10,000,000 10,000,000 5,159,653 6,782,015 15,159,653 16,782,015 35,638,751 38,147,863 2010 744,385 8,113,797 12,282,353 21,140,535 16,004,278 3,000,000 40,144,813 8,800,100 8,188,235 16,988,335 4,464,966 21,453,301 370,372 10,000,000 8,321,139 18,321,139 40,144,812 Panel b. Common Size Balance Sheet (standardized by total assets for each year) Cash and marketable securities 1.85% 1.82% 1.84% Accounts receivable 19.73% 19.93% 19.42% Inventories 29.66% 29.86% 31.29% Current assets 51.24% 51.62% 52.56% Net property, plant, & equipment 39.86% 39.97% 39.58% Investments 8.90% 8.42% 7.86% Total 100% 100% 100% Accounts payable 23.17% 23.24% 23.01% Short-term debt 20.39% 20.45% 20.25% Current liabilities 43.56% 43.68% 43.26% Long-term liabilities 13.65% 12.81% 11.81% Total liabilities 57.22% 56.49% 55.07% Deferred income taxes 0.98% 0.97% 0.94% Common stock 29.66% 28.06% 26.21% Retained earning 12.14% 14.48% 17.78% Total owners' equity 41.80% 42.54% 43.99% Total liabilities and owners' equity 100% 100% 100% 1.85% 20.21% 30.60% 52.66% 39.87% 7.47% 100% 21.92% 20.40% 42.32% 11.12% 53.44% 0.92% 24.91% 20.73% 45.64% 100% 2007 624,000 6,651,500 10,001,000 17,276,500 13,437,500 3,000,000 33,714,000 7,812,500 6,875,000 14,687,500 4,603,061 19,290,561 329,749 10,000,000 4,093,690 14,093,690 33,714,000 Table 6-3 Better Buys Inc. Statement of Cash Flow for 2008-2010 2008 2009 2010 Cash flows from Operations ($) Net Income #VALUE! #VALUE! #VALUE! Depreciation 1,343,750 1,424,375 1,509,838 #VALUE! #VALUE! #VALUE! (Increase) decrease in accounts receivable -450,500 -306,738 -705,059 (Increase) decrease in inventory -642,000 -1,295,250 -344,103 -1,092,500 -1,601,988 -1,049,162 Increase (decrease) in accounts payable 468,750 496,875 21,975 Increase (decrease) in deferred income taxes 16,880 12,149 11,594 Cash provided by operations #VALUE! #VALUE! #VALUE! Cash form Investing Activities (Increase) decrease in net fixed assets -2,150,000 -2,279,000 -2,415,741 Cash flow from investing activities -2,150,000 -2,279,000 -2,415,741 Cash Flows form Financing Activities Increase (decrease) in short-term debt 412,500 437,250 463,485 Increase (decrease) in long-term liabilities -39,342 -59,524 -39,229 Increase (decrease) in common stock Dividends paid -200,000 -200,000 -200,000 Cash flow from financing activities 173,158 177,726 224,256 Change in cash ($) #VALUE! #VALUE! #VALUE! Table 6-4 Better Buy Inc. Firm and Equity Free Cash Flow Calculations for 2008-2010 Panel a. Firm Free Cash Flow Calculation 2008 2009 2010 Direct method Net Operating income 2,784,375 3,598,125 3,487,380 Less Taxes on operating income (1,113,750) (1,439,250) (1,394,952) Net Operating Profit after taxes (NOPAT) 1,670,625 2,158,875 2,092,428 Increase (Decrease) deferred taxes 16,880 12,149 11,594 Plus: Depreciation 1,343,750 1,424,375 1,509,838 Less CAPEX (2,150,000) (2,279,000) (2,415,741) Less: Change in operating net working capital (649,750) (1,157,613) (1,069,072) Firm free cash flow (from operations) 231,505 158,786 129,047 Non-operating income afetr taxes (40%) 180,000 180,000 180,000 Firm free cash flow available to all investors 411,505 338,786 309,047 Indirect Method Interest (1 - Tax rate) 584,663 516,513 533,305 (Increase) Decrease in short-term debt (412,500) (437,250) (463,485) (Increase) Decrease in long-term liabilities 39,342 59,524 39,229 Dividends 200,000 200,000 200,000 (Increase) Decrease in common stock 0 0 0 Firm free cash flow available to all investors 411,505 338,787 309,049 Panel b. Equity Free Cash Flow (Equity FCF) Calculation Net income #VALUE! #VALUE! #VALUE! Plus: Depreciation 1,343,750 1,424,375 1,509,838 Increase (Decrease) in long-term liabilities (39,342) (59,524) (39,229) Increase (Decrease) in short-term debt 412,500 437,250 463,485 Increase (Decrease) in deferred income taxes 16,880 12,149 11,594 Less: Change in operating NWC (649,750) (1,157,613) (1,069,072) Less: Capital expenditures (2,150,000) (2,279,000) (2,415,741) Equity FCF #VALUE! #VALUE! #VALUE! Indirect Method Dividends 200,000 200,000 200,000 Less: New stock issues 0 0 0 Plus: Stock repurchases Equity free cash flow (Equity FCF) 200,000 200,000 200,000 Table 6-4 Better Buy Inc. Firm and Equity Free Cash Flow Calculations for 2008-2010 Panel a. Firm Free Cash Flow Calculation 2008 2009 2010 Direct method Net Operating income 2,784,375 3,598,125 3,487,380 Less Taxes on operating income (1,113,750) (1,439,250) (1,394,952) Net Operating Profit after taxes (NOPAT) 1,670,625 2,158,875 2,092,428 Increase (Decrease) deferred taxes 16,880 12,149 11,594 Plus: Depreciation 1,343,750 1,424,375 1,509,838 Less CAPEX (2,150,000) (2,279,000) (2,415,741) Less: Change in operating net working capital (649,750) (1,157,613) (1,069,072) Firm free cash flow (from operations) 231,505 158,786 129,047 Non-operating income afetr taxes (40%) 180,000 180,000 180,000 Firm free cash flow available to all investors 411,505 338,786 309,047 Indirect Method Interest (1 - Tax rate) 584,663 516,513 533,305 (Increase) Decrease in short-term debt (412,500) (437,250) (463,485) (Increase) Decrease in long-term liabilities 39,342 59,524 39,229 Dividends 200,000 200,000 200,000 (Increase) Decrease in common stock 0 0 0 Firm free cash flow available to all investors 411,505 338,787 309,049 Panel b. Equity Free Cash Flow (Equity FCF) Calculation Net income #VALUE! #VALUE! #VALUE! Plus: Depreciation 1,343,750 1,424,375 1,509,838 Increase (Decrease) in long-term liabilities (39,342) (59,524) (39,229) Increase (Decrease) in short-term debt 412,500 437,250 463,485 Increase (Decrease) in deferred income taxes 16,880 12,149 11,594 Less: Change in operating NWC (649,750) (1,157,613) (1,069,072) Less: Capital expenditures (2,150,000) (2,279,000) (2,415,741) Equity FCF #VALUE! #VALUE! #VALUE! Indirect Method Dividends 200,000 200,000 200,000 Less: New stock issues 0 0 0 Plus: Stock repurchases Equity free cash flow (Equity FCF) 200,000 200,000 200,000 Cash Flow From Operations - Reconciliation of the Stat. of Cash Flows and Firm FCF From 2008 2009 2010 Cash Flow Sta. Cash provided by operations #VALUE! #VALUE! #VALUE! Cash Flow Sta. Less: increase in cash balance #VALUE! #VALUE! #VALUE! FCF Plus: After-tax interest expense 584,663 516,513 533,305 FCF Less: After-tax other income (180,000) (180,000) (180,000) Cash Flow Sta. Less: Capital expenditures (CAPEX) (2,150,000) (2,279,000) (2,415,741) Firm FCF (from operations) #VALUE! #VALUE! #VALUE! p. 201 Table 6-5 Proforma - Income Statement for 2011 - 2015 Income Statement Forecast Method Revenues Constant growth rate Cost of goods sold % of sales Gross profit Calculated Operating expenses Fixed cash operating expenses Constant Variable cash operating expenses % of Sales Depreciation expense % of fixed assets (t-1) Net operating income Calculated Nonoperating income % of investments (t-1) Earnings before interest and taxes Calculated Interest expense % of tot.liabilities (t-1) Earnings before taxes Calculated Taxes (40%) Tax rate * EBT Net income Calculated Dividends paid Pol.var-fixed $ amount Addition to retained earnings Calculated Assumption 2011 6.00% 39,452,405 64.8% -25,578,309 13,874,096 2,000,000 16.1% 10.0% 10.0% 7.0% 40.0% 200,000 2,000,000 6,338,686 1,600,428 3,934,982 300,000 4,234,982 -885,724 3,349,258 -1,339,703 2,009,555 -200,000 1,809,555 2012 41,819,549 -27,113,008 14,706,541 2,000,000 6,719,007 1,696,453 4,291,081 300,000 4,591,081 -877,441 3,713,640 -1,485,456 2,228,184 -200,000 2,028,184 2013 2014 44,328,722 46,988,446 -28,739,788 -30,464,176 15,588,934 16,524,270 2,000,000 7,122,148 1,798,241 4,668,546 300,000 4,968,546 -859,652 4,108,893 -1,643,557 2,465,336 -200,000 2,265,336 2,000,000 7,549,476 1,906,135 5,068,658 300,000 5,368,658 -832,617 4,536,041 -1,814,417 2,721,625 -200,000 2,521,625 2015 49,807,752 -32,292,026 17,515,726 2,000,000 8,002,445 2,020,503 5,492,778 300,000 5,792,778 -795,433 4,997,345 -1,998,938 2,998,407 -200,000 2,798,407 Table 6.6 Better Buy Inc. Pro-Forma Balance Sheets for 2011-2015 Balance Sheet Forecast Method Assumption Cash and marketable securities % of revenue 1.90% Accounts receivable % of revenue 21.4% Inventories % of revenue 32.70% Current assets Calculated Net property, plant, & equipment of revenue % 43.0% Investments Policy variable Constant Total Calculated Accounts payable % of revenue 22.80% Short-term debt % of revenue 20.30% Current liabilities Calculated Long-term liabilities Policy variable Balanc.Term Total liabilities Calculated Deferred income taxes % of tax liability 2.00% Common stock Policy variable Constant Retained earnings Calculated Total owners' equity Calculated Total liabilities and owners' equity Calculated 2011 749,596 8,442,815 12,900,936 22,093,347 16,964,534 3,000,000 42,057,881 8,995,148 8,008,838 17,003,987 4,526,035 21,530,022 397,166 10,000,000 10,130,694 20,130,694 42,057,881 2012 794,572 8,949,384 13,674,993 23,418,948 17,982,406 3,000,000 44,401,354 9,534,857 8,489,369 18,024,226 3,791,376 21,815,602 426,875 10,000,000 12,158,877 22,158,877 44,401,354 2013 842,246 9,486,347 14,495,492 24,824,085 19,061,351 3,000,000 46,885,435 10,106,949 8,998,731 19,105,679 2,895,797 22,001,476 459,746 10,000,000 14,424,213 24,424,213 46,885,436 2014 892,781 10,055,527 15,365,222 26,313,530 20,205,032 3,000,000 49,518,562 10,713,366 9,538,654 20,252,020 1,824,669 22,076,689 496,035 10,000,000 16,945,838 26,945,838 49,518,562 2015 946,348 10,658,859 16,287,135 27,892,342 21,417,334 3,000,000 52,309,675 11,356,168 10,110,974 21,467,141 562,276 22,029,417 536,013 10,000,000 19,744,245 29,744,245 52,309,676 Table 6-7 Better Buys Inc. Proforma Statement of Cash Flow for 2011-2015 Cash flows from Operations ($) 2011 2012 2013 Net Income 2,009,555 2,228,184 2,465,336 Depreciation 1,600,428 1,696,453 1,798,241 3,609,982 3,924,637 4,263,577 (Increase) decrease in accounts receivable -329,018 -506,569 -536,963 (Increase) decrease in inventory -618,583 -774,056 -820,500 -947,601 -1,280,625 -1,357,463 (Increase) decrease in accounts payable 195,048 539,709 572,091 (Increase) decrease in deferred income taxes 26,794 29,709 32,871 Cash provided by operations 2,884,224 3,213,430 3,511,077 Cash Flows from Investing Activities (Increase) decrease in net fixed assets -2,560,684 -2,714,325 -2,877,185 Cash flow from investing activities -2,560,684 -2,714,325 -2,877,185 Cash Flows from Financing Activities Increase (decrease) in short-term debt -179,397 480,530 509,362 Increase (decrease) in long-term liabilities 61,069 -734,659 -895,579 Increase (decrease) in common stock Dividends paid -200,000 -200,000 -200,000 Cash flow from financing activities -318,328 -454,129 -586,217 Change in cash ($) 5,212 44,976 47,675 2014 2,721,625 1,906,135 4,627,760 -569,181 -869,730 -1,438,910 606,417 36,288 3,831,555 2015 2,998,407 2,020,503 5,018,910 -603,332 -921,913 -1,525,245 642,802 39,979 4,176,446 -3,049,816 -3,049,816 -3,232,805 -3,232,805 539,924 -1,071,128 -200,000 -731,204 50,535 572,319 -1,262,393 -200,000 -890,074 53,567 Table 6-8 Better Buy Inc. Free Cash Flow Forecast for 2011-2015 Panel a. Firm Free Cash Flow Calculation 2011 Net operating income 3,934,982 Less taxes on operating income -1,573,993 Net operating profit after taxes (NOPAT) 2,360,989 Increase (Decrease) deferred taxes 26,794 Plus: Depreciation 1,600,428 Less CAPEX -2,560,684 Less: Change in operating net working capital -757,764 Firm free cash flow (from operations) 669,763 Non-operating income after taxes (40%) 180,000 Free cash flow available to all investors 849,763 2012 4,291,081 -1,716,432 2,574,648 29,709 1,696,453 -2,714,325 -785,892 800,594 180,000 980,594 2013 4,668,546 -1,867,418 2,801,127 32,871 1,798,241 -2,877,185 -833,045 922,009 180,000 1,102,009 2014 5,068,658 -2,027,463 3,041,195 36,288 1,906,135 -3,049,816 -883,028 1,050,774 180,000 1,230,774 2015 5,492,778 -2,197,111 3,295,667 39,979 2,020,503 -3,232,805 -936,010 1,187,334 180,000 1,367,334 Panel b. Equity Free Cash Flow (Equity FCF) Calculation Net income Plus: Depreciation Increase (Decrease) in long-term liabilities Increase (Decrease) in short-term debt Increase (Decrease) in deferred income taxes Less: Change in operating NWC Less: Capital expenditures (CAPEX) Equity FCF 2,228,184 1,696,453 -734,659 480,530 29,709 -785,892 -2,714,325 200,000 2,465,336 1,798,241 -895,579 509,362 32,871 -833,045 -2,877,185 200,001 2,721,625 1,906,135 -1,071,128 539,924 36,288 -883,028 -3,049,816 200,000 2,998,407 2,020,503 -1,262,393 572,319 39,979 -936,010 -3,232,805 200,000 2,009,555 1,600,428 61,069 -179,397 26,794 -757,764 -2,560,684 200,001