Question
your employer, a mid-sized human resources management company, is considering expansion into related fields, including the acquisition of Temp Force Company, an employment agency that
your employer, a mid-sized human resources management company, is considering expansion into related fields, including the acquisition of Temp Force Company, an employment agency that supplies word processor operators and computer programmers to businesses with temporary heavy workloads. your employer is also considering the purchase of Biggerstaff & McDonald, a privately held company owned by two friends, each with 5 million shares of stock. B&M currently has free cash flow of 24 million, which is expected to grow at a constant rate of 5%. B&M's financial statements report short-term investments of $100 million, debt of $200 Million, and preferred stock of 50 million. B&M's weighted average cost of capital is 11%. Answer the following questions: Your employer also is considering the aquisition of Hatfield Medical Suplies. you have gathered the following data regarding Hatfield, with all dollars reported in millions. 1) most recent sales of $2,000; 2) most recent total net operating capital, OpCap=$1,120; 3) most recent operating profitability ratio, OP=NOPAT/Sales=4.5%; and 4) mostrecent capital requirement ratio, CR=OPCAP/sales=56%. you estimate that the growth rate in sales from year 0 to year 1 will be 10%, from year 1 to year 2 will be 8%, from year 2 to year 3 will be5%, and from year 3 to year 4 will be 5%. you also estimate that the long-term growth rate beyond Year 4 will be 5%. assume the operating profitability and capital requirement ratios will not change. use this information to forecast Hatfield's sales, net operating profit after taxes, OpCap, free cash flow, and return on invested capital for years 1 through 4. also estimate the annual growth in free cash flow for years 2 through 4. the weighted average cost of capital is 9%. how does the ROIC in year 4 compare with the WACC?
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