Intermediate Financial Management (with Thomson One)

Balance Sheets for December 31 (Millions of Dollars)
2006 2006
Assets Liabilities and Equity
Cash $ 8.0 Accounts payable $ 16.0
Marketable securities 20.0 Notes payable 40.0
Accounts receivable 80.0 Accruals 40.0
Inventories 160.0 Total current liabilities $ 96.0
Total current assets $268.0 Long-term bonds 300.0
Net plant and equipment 600.0 Preferred stock 15.0
Common stock (par plus PIC) 257.0
Retained earnings 200.0
Common equity $457.0
Total assets $868.0 Total liabilities and equity $868.0
The ratios and selected information for the current and projected years are shown
below.
PROJECTED
Actual
2006 2007 2008 2009 2010
Sales growth rate 15% 10% 6% 6%
Costs/sales 72% 72 72 72 72
Depreciation/net PPE 10 10 10 10 10
Cash/sales 1 1 1 1 1
Accounts receivable/sales 10 10 10 10 10
Inventories/sales 20 20 20 20 20
Net PPE/sales 75 75 75 75 75
Accounts payable/sales 2 2 2 2 2
Accruals/sales 5 5 5 5 5
Tax rate 40 40 40 40 40
Weighted average cost of capital (WACC) 10.5 10.5 10.5 10.5 10.5
a. Forecast the parts of the income statement and balance sheets necessary to calculate
free cash flow.
b. Calculate free cash flow for each projected year. Also calculate the growth rates
of free cash flow each year to ensure that there is constant growth (that is, the
same as the constant growth rate in sales) by the end of the forecast period.
c. Calculate operating profitability (OP NOPAT/Sales), capital requirements
(CR Operating capital/Sales), and expected return on invested capital
(EROIC Expected NOPAT/Operating capital at beginning of year). Based on
the spread between expected ROIC and WACC, do you think that the company
will have a positive market value added (MVA Market value of company
Book value of company Value of operations Operating capital)?
d. Calculate the value of operations and MVA. (Hint: First calculate the horizon
value at the end of the forecast period, which is equal to the value of operations
at the end of the forecast period. Assume that growth beyond the horizon
is 6 percent.)
e. Calculate the price per share of common equity as of 12/31/2006.
Chapter 11 Corporate Value and Value-Based Management • 391