Assignment 2 (due 2/17)

Answer the following questions using the financial statements and the additional data provided below.
If necessary, make assumptions and explain them with your answer.
1.
2.
3.
4.
5.
6.
7.

Find NOPLAT for years 1 to 6.

Calculate FCF for years 1 to 6.
Can we assume that the market value of debt equal to its book value? Why or why not? Explain.
Compute WACC.
Estimate continuing value at the end of year 5.
Estimate the enterprise value.
Estimate the intrinsic value per share of the stock.

Income Statement and Reorganized Balance Sheet

$ million
Income statement
Revenues
Operating costs
Depreciation
Operating profits

Today

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

3,777.1
(3,245.1)
(82.9)
449.1

4,041.5
(3,435.2)
(97.0)
509.2

4,304.2
(3,658.5)
(103.3)
542.3

4,583.9
(3,896.3)
(110.0)
577.6

4,859.0
(4,130.1)
(116.6)
612.2

5,126.2
(4,357.3)
(123.0)
645.9

5,382.5
(4,575.1)
(129.2)
678.2

(14.0)
435.1

(14.0)
495.2

###
528.3

(14.0)
563.5

(14.0)
598.2

(14.0)
631.9

(14.0)
664.2

(130.5)
304.6

(148.6)
346.6

(158.5)
369.8

(169.1)
394.5

(179.5)
418.7

(189.6)
442.3

(199.2)
464.9

Interest
Earnings before taxes
Taxes
Net income
1

Accounts payable has been netted against inventory to determine operating working capital.

Additional Data Provided

Operating-profit tax rate

30.0%

Shares outstanding, millions

65.6
Current share price, $
57.00
The pretax cost of debt is 8 percent, the cost of equity is 12 percent, and the marginal tax rate is 30 percent.
The long-term growth rate in cash flows is 5 percent and the RONIC is 15 percent.
This company currently does not have nonoperating assets.

Reorganized balance sheet

Operating working capital
Property and equipment
Invested capital
Debt
Shareholders' equity
Invested capital

Today

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

188.9
1,510.8
1,699.7

202.1
1,616.6
1,818.7

215.2
1,721.7
1,936.9

229.2
1,833.6
2,062.8

242.9
1,943.6
2,186.5

256.3
2,050.5
2,306.8

269.1
2,153.0
2,422.1

280.5
1,419.2
1,699.7

###
1,538.2
1,818.7

280.5
1,656.4
1,936.9

280.5
1,782.3
2,062.8

280.5
1,906.0
2,186.5

280.5
2,026.3
2,306.8

280.5
2,141.6
2,422.1

Question 1
NOPLAT, $ million
Revenues
Operating costs
Depreciation
Operating profits
Operating taxes
NOPLAT

Today
3,777.1
(3,245.1)
(82.9)
449.1
134.72
314.4

Year 1
Year 2
4,041.5
4,304.2
(3,435.2) (3,658.5)
(97.0)
(103.3)
509.2
542.3
152.77
356.5

162.70
379.6

Year 3
Year 4
Year 5
Year 6
4,583.9
4,859.0
5,126.2
5,382.5
(3,896.3) (4,130.1) (4,357.3) (4,575.1)
(110.0)
(116.6)
(123.0)
(129.2)
577.6
612.2
645.9
678.2
173.27
404.3

183.67
428.6

193.77
452.1

203.45
474.7

Question 2
Free cash flow, $ million
NOPLAT
Depreciation
Gross cash flow
Increase in working capital
Capital expenditures
Free cash flow

Today
314.4
(82.9)
397.3

Year 1
356.5
(97.0)
453.5

Year 2
379.6
(103.3)
482.9

Year 3
404.3
(110.0)
514.3

Year 4
428.6
(116.6)
545.2

Year 5
452.1
(123.0)
575.2

Year 6
474.7
(129.2)
603.9

(13.2)
(202.7)
237.5

(13.1)
(208.4)
261.4

(14.0)
(221.9)
278.4

(13.8)
(226.6)
304.8

(13.4)
(229.9)
331.9

(12.8)
(231.7)
359.4

Question 3
Can we assume that the market value of debt equal to its book value? Why or why not? Explain.
Answer: No because market value is less than that of its Current debt value this is due to the fact that the company actually owes less

Equity value
Shares outstanding, millions
Times: Share price, $
Equity value, $ million

65.6
57.00
3,739.2

Weighted average cost of capital

Source of capital
Debt
Equity
Enterprise value

Market value,
$ million
280.5
3,739.2
4,019.7

Proportion
of total
capital, %
7.0%
93.0%
100.0%

Cost of
capital, %
8.0%
12.0%

Marginal
tax rate, %
30.0%

After-tax
cost of
capital, %
5.6%
12.0%

mpany actually owes less in debt.

Contribution
to weighted
average, %
0.4%
11.2%
11.55%
This answer is based on the assumption that __________The Weighted Average for the company will increase

Questions 5, 6 & 7
$ million

Free cash flow (FCF)

Discounted FCF
Continuing value

Year
1

237.5
212.9

261.4
210.1

278.4
200.6

304.8
196.8

331.9
192.1
4,831.8

PV of explicit FCFs
PV of continuing value
PV of operations

1,012.5
2,765.5
3,778.0

Midyear adjustment

3,990.3 Don't make any change in this cell (C14) as it has a form

PV of nonoperating assets
Enterprise value
Debt
Equity value
Value per share, $

This company does not have nonoperating assets.

4,019.7
280.5
3,739.2
61.28

This answer is based on the assumption that _____Value per share is muc
WACC, %
Long-term growth rate, %
RONIC, %

11.55%
5.00%
15.00%

14) as it has a formula to automatically make mideyear adjust for PV of operations.

ating assets.

ue per share is much lower than expected

474.7243

0.333333

0.6666666667
316.4828659572
0.0655 4831.799