yen that res are being used to the equipment and capital expenditures ar obtain fixed assets that are depreciable. of INCOME APPROACH (worth 45 points) 1. Forecast. Use the Discounted Cash Flow Analy provided by your instructor and forecast revenue for Current Year + 1 (CY+1), CY+2, CY+3. an Year. For this case study, use only the previous enues and expenses as a guide. (Normally, you wo use other information about the economy, the indust company, and so forth). Come up with your own reaso forecast. low Analysis spreadsheet ast revenues and expenses CY+3, and Terminal the previous years' rev- ormally, you would also 2. Net income. Calculate the net income for CY+1, CY+2. CY_3 and terminal year. 3. Net cash flow. Calculate the net cash flow for CY+1, CY+2, CY+3, and terminal year. a. As described on p. 277-279 and illustrated in Exhibit 10.9, calculate NCF from net income. b. Start with net income and add back depreciation and amortization to find gross cash flow. C. Subtract CAPEX from gross cash flow. d. Subtract any increase (or add any decrease) in net capital. To calculate changes in NWC, subtract current bilities from current assets (not including inventory, INCO 1. that will allow you to calculate valuations for Duke's under the income and market approaches. FACTS 1. The company's assets are cash ($100,000), inventory (worth $400,000 based on cost), and accounts receivable ($25,000). a. Inventory can be sold back to manufacturers for 50% of its cost. b. Accounts receivable can be sold to a collections agency for 40% of its current level. 2. The company's liabilities are accounts payable of $75,000 and accrued expenses of $75,000. 3. The Discounted Cash Flow Analysis spreadsheet shows the most recent three years' income statements in simpli- fied form. 4. Assume the company pays a corporate tax rate of 40%. 5. For the current year, depreciation and amortization is $25,000. The company is using straight-line depreciation. Thus, D&A is expected to be $25,000 going forward. 6. The physical depreciation and/or amortization of fixed assets is allowed to be booked as an expense, thus lowering the tax- able income. Yet, it is not an actual decrease in dollars so it is not a decrease in cash flow. That is why it is added back in to Net Income on the way to calculating Net Cash Flow. Net Cash Flow is actual physical dollars coming out of the business dur- ing the time period. 7. There is no interest expense. ent in Sport CAS itures (CAPEX) is enditure of money and other assets ney in the future se it is spent in the ugh to the owners 8. For the current year, capital expenditures $50,000. CAPEX refers to the current expenditure by the company to purchase equipment and oth that will help the company earn more money in th It directly affects net cash flow because it is spa current year instead of being passed through to the (as NCF). ASSUMPTIONS 1. Assume the discount rate is 16% (based on comparable collected from Ibbotson's database and other adjustments for risk) 2. Assume that the perpetual growth rate of net cash flow is 3.5% for the terminal year and beyond the terminal year is the fourth year out from the current year, and it rep- resents every year thereafter, adjusted for the perpetual growth rate). me fair e's"). mar- te is es 3. Assume CAPEX is constant over the relevant time periods because the company is consistently and constantly investing in its future. 4. Assume D&A will continue to be $25.000 per year, given that the equipment and capital expenditures are being use obtain fixed assets that are depreciable. INCOME APPROACH buorth 16 mintal and gi even though inventory is technically a current asset a manager would not want to rely on inventory to pay work- 2. Mary's ers). Make a reasonable assumption for changes in NWC and ha for future years. areat e. The result is net cash flow. which 4. Net present value. Calculate the NPV of Duke's. that t sales a. Determine the discount period for each year (CY and going the forward). 3. Jam b. Determine the discount factor for each year, including the loca terminal year. city C. Enter the discount rate and perpetual growth rate in the add spreadsheet. d. Calculate the terminal value. e. Calculate the present value of the NCF for each year, including the terminal year. loa tha 1. Add up each year's present value to find the net present value of the entire business, based on cash flow. Anir Question: Calculate the net present value (NPV) of Duke's Sporting Goods Store in the... Calculate the net present value (NPV) of Duke's Sporting Goods Store in the Case Analysis at the end of Chapter 10 (below). Follow the income Approach steps and determine NPV at the last step. Show all work in arriving at the answer. As described in Sidebar 4.C (p. 96), the Silna family had a contract to receive 1/7th of the television revenue of four NBA teams (Denver Nuggets, San Antonio Spurs, Brooklyn Nets, and Indiana Pacers) in perpetuity. The NBA's television deal running from the 2008-2009 season through the 2015-2016 season paid the fam-ily $18.9 million annually. Use the above information and the following parameters to calculate the NPV of the contract. . The valuation date is January 1, 2009. Assume that the Silnas received their first payment on January 1, 2009, and that the payments will continue annually thereafter. Assume that the Silnas are taxed at 35% for their income on this deal. Assume that their payments from this NBA deal will grow at 2% per year in perpetuity after the final year of this contract. (Although the Silnas' deal has ended in reality, for purposes of this exercise we will assume that the deal will continue forever.) Assume a discount rate of 8%. Create a table that shows the results you found and gives a brief description of your steps, assumptions, and so forth. yen that res are being used to the equipment and capital expenditures ar obtain fixed assets that are depreciable. of INCOME APPROACH (worth 45 points) 1. Forecast. Use the Discounted Cash Flow Analy provided by your instructor and forecast revenue for Current Year + 1 (CY+1), CY+2, CY+3. an Year. For this case study, use only the previous enues and expenses as a guide. (Normally, you wo use other information about the economy, the indust company, and so forth). Come up with your own reaso forecast. low Analysis spreadsheet ast revenues and expenses CY+3, and Terminal the previous years' rev- ormally, you would also 2. Net income. Calculate the net income for CY+1, CY+2. CY_3 and terminal year. 3. Net cash flow. Calculate the net cash flow for CY+1, CY+2, CY+3, and terminal year. a. As described on p. 277-279 and illustrated in Exhibit 10.9, calculate NCF from net income. b. Start with net income and add back depreciation and amortization to find gross cash flow. C. Subtract CAPEX from gross cash flow. d. Subtract any increase (or add any decrease) in net capital. To calculate changes in NWC, subtract current bilities from current assets (not including inventory, INCO 1. that will allow you to calculate valuations for Duke's under the income and market approaches. FACTS 1. The company's assets are cash ($100,000), inventory (worth $400,000 based on cost), and accounts receivable ($25,000). a. Inventory can be sold back to manufacturers for 50% of its cost. b. Accounts receivable can be sold to a collections agency for 40% of its current level. 2. The company's liabilities are accounts payable of $75,000 and accrued expenses of $75,000. 3. The Discounted Cash Flow Analysis spreadsheet shows the most recent three years' income statements in simpli- fied form. 4. Assume the company pays a corporate tax rate of 40%. 5. For the current year, depreciation and amortization is $25,000. The company is using straight-line depreciation. Thus, D&A is expected to be $25,000 going forward. 6. The physical depreciation and/or amortization of fixed assets is allowed to be booked as an expense, thus lowering the tax- able income. Yet, it is not an actual decrease in dollars so it is not a decrease in cash flow. That is why it is added back in to Net Income on the way to calculating Net Cash Flow. Net Cash Flow is actual physical dollars coming out of the business dur- ing the time period. 7. There is no interest expense. ent in Sport CAS itures (CAPEX) is enditure of money and other assets ney in the future se it is spent in the ugh to the owners 8. For the current year, capital expenditures $50,000. CAPEX refers to the current expenditure by the company to purchase equipment and oth that will help the company earn more money in th It directly affects net cash flow because it is spa current year instead of being passed through to the (as NCF). ASSUMPTIONS 1. Assume the discount rate is 16% (based on comparable collected from Ibbotson's database and other adjustments for risk) 2. Assume that the perpetual growth rate of net cash flow is 3.5% for the terminal year and beyond the terminal year is the fourth year out from the current year, and it rep- resents every year thereafter, adjusted for the perpetual growth rate). me fair e's"). mar- te is es 3. Assume CAPEX is constant over the relevant time periods because the company is consistently and constantly investing in its future. 4. Assume D&A will continue to be $25.000 per year, given that the equipment and capital expenditures are being use obtain fixed assets that are depreciable. INCOME APPROACH buorth 16 mintal and gi even though inventory is technically a current asset a manager would not want to rely on inventory to pay work- 2. Mary's ers). Make a reasonable assumption for changes in NWC and ha for future years. areat e. The result is net cash flow. which 4. Net present value. Calculate the NPV of Duke's. that t sales a. Determine the discount period for each year (CY and going the forward). 3. Jam b. Determine the discount factor for each year, including the loca terminal year. city C. Enter the discount rate and perpetual growth rate in the add spreadsheet. d. Calculate the terminal value. e. Calculate the present value of the NCF for each year, including the terminal year. loa tha 1. Add up each year's present value to find the net present value of the entire business, based on cash flow. Anir Question: Calculate the net present value (NPV) of Duke's Sporting Goods Store in the... Calculate the net present value (NPV) of Duke's Sporting Goods Store in the Case Analysis at the end of Chapter 10 (below). Follow the income Approach steps and determine NPV at the last step. Show all work in arriving at the answer. As described in Sidebar 4.C (p. 96), the Silna family had a contract to receive 1/7th of the television revenue of four NBA teams (Denver Nuggets, San Antonio Spurs, Brooklyn Nets, and Indiana Pacers) in perpetuity. The NBA's television deal running from the 2008-2009 season through the 2015-2016 season paid the fam-ily $18.9 million annually. Use the above information and the following parameters to calculate the NPV of the contract. . The valuation date is January 1, 2009. Assume that the Silnas received their first payment on January 1, 2009, and that the payments will continue annually thereafter. Assume that the Silnas are taxed at 35% for their income on this deal. Assume that their payments from this NBA deal will grow at 2% per year in perpetuity after the final year of this contract. (Although the Silnas' deal has ended in reality, for purposes of this exercise we will assume that the deal will continue forever.) Assume a discount rate of 8%. Create a table that shows the results you found and gives a brief description of your steps, assumptions, and so forth