You should submit the following spreadsheets (with values, not formulae):

(a) Projected (partial) income statement,

2. You must also submit your income statement and balance sheet assumptions. Explain how you made adjustments to base year values where necessary. Explanations may be provided separately or shown (with clear labeling) on the spreadsheets.

Assumptions

Please make the following assumptions.

1. The weighted average cost of capital is 6%.

2. Warren’s sales will grow at the following rate:

2018	2019	2020	2021	2022
4%	3%	4%	3%	3%

3. As an analyst, you believe the asset “Goodwill” will be fully impaired in 2019. Assume also that the impairment is NOT tax-deductible.

4. The company expects the asset Patents to be amortized as follows in the next five years:

2018: $30

2019: $25

2020: $23

2021: $20

2022: $17

5. The asset Trade Names is not amortized by the company – it is assumed to have an infinite life. An independent analyst has estimated the fair value of the asset is $387 at the end of 2017.

6. The company’s long term notes payable carries an interest rate of 5%. The fair value of the company’s debt is as follows on December 31, 2017:

Short term notes	395
Line of Credit	210
Notes payable	847

7. The company owns 30% of the equity of Lillian Co. Warren uses the equity method to account for its investment in Lillian. Lillian’s competitors have an average price-earnings multiple of 15.

8. The litigation and regulatory expense reported by the company in 2017 is because of a court ruling made in 2017. Analysts believe the company will incur an additional $46 in 2018.

9. Bernards Inc. will likely have the same days inventory and days accounts payable in the future as in 2017. However, days receivable should be 35 in 2018, 33 in 2019, and then 32 thereafter.

10. The company generally includes gains and losses on asset sales (including sales of short term investments) in selling, general and administrative expenses.

11. Cost of goods sold in 2017 includes rationalization expenses of $121. The rationalization program has been completed.

12. The composition of income tax expense in 2017 is as follows.

Current tax expense 477

Deferred tax expense 60

13. The reconciliation of the statutory rate with the effective tax rate (excluding income under the equity method, which is reported net of income taxes on the income statement) is as follows:

	2017	2016	2015
Statutory rate	35.0%	35.0%	35.0%
State tax	1.2%	1.3%	0.8%
Tax credits	-2.1%		-2.7%
Permanent differences	-0.8%	-6.1%
Effective tax rate	33.3%	30.2%	33.1%

Starting 2018, the new federal tax rate will be 21%.

14. The new federal tax rate will have the effect of reducing the deferred tax assets and liabilities. Assume that all Bernards Inc.’s deferred taxes are related to federal, and not state, taxation.

15. For the Free Cash Flow method, assume that free cash flows beyond 2022 grow at 2.0%.

16. For the residual NOPAT method assume that the residual NOPAT grows at 2.0% from 2023 on.

17. Where you need to make additional assumptions, please briefly document your assumption.