Corporate Valuation, Build a Model by 92m08d4

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									                                 Chapter 13. Solution for Ch 13-11 Build a Model

The Henley Corporation is a privately held company specializing in lawn care products and services. The most recent
financial statements are shown below.


Income Statement for the Year Ending December 31 (Millions of Dollars)
                                                           2010
Net Sales                                          $     800.0
Costs (except depreciation)                        $     576.0
Depreciation                                       $       60.0
  Total operating costs                            $     636.0
Earning before int. & tax                          $     164.0
  Less interest                                    $       32.0
Earning before taxes                               $     132.0
  Taxes (40%)                                      $       52.8
Net income before pref. div.                       $       79.2
  Preferred div.                                   $        1.4
Net income avail. for com. div.                    $       77.9
Common dividends                                   $       31.1
Addition to retained earnings                      $       46.7

Number of shares (in millions)                                 10
Dividends per share                                    $     3.11


Balance Sheets for December 31 (Millions of Dollars)
Assets                                                       2010                 Liabilities and Equity
Cash                                                   $      8.0                 Accounts Payable
Marketable Securities                                        20.0                 Notes payable
Accounts receivable                                          80.0                 Accruals
Inventories                                                 160.0                  Total current liabilities
  Total current assets                                 $    268.0                 Long-term bonds
Net plant and equipment                                     600.0                 Preferred stock
                                                                                  Common Stock
Total Assets                                           $    868.0                 (Par plus PIC)

                                                                                  Retained earnings
                                                                                   Common equity
                                                                                  Total liabilities and equity

Projected ratios and selected information for the current and projected years are shown below.

Inputs                                                      Actual    Projected       Projected      Projected
                                                             2010         2011            2012           2013
Sales Growth Rate                                                          15%              10%            6%
Costs / Sales                                                 72%          72%              72%           72%
Depreciation / Net PPE                                        10%          10%              10%           10%
Cash / Sales                                                      1%             1%              1%              1%
Acct. Rec. / Sales                                               10%            10%             10%             10%
Inventories / Sales                                              20%            20%             20%             20%
Net PPE / Sales                                                  75%            75%             75%             75%
Acct. Pay. / Sales                                                2%             2%              2%              2%
Accruals / Sales                                                  5%             5%              5%              5%
Tax rate                                                         40%            40%             40%             40%
Weighted average cost of capital (WACC)                        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.

Partial Income Statement for the Year Ending December 31 (Millions of Dollars)
                                                               Actual       Projected       Projected       Projected
                                                                2010            2011            2012            2013
Net Sales                                               $      800.0    $      920.0    $    1,012.0    $    1,072.7
Costs (except depreciation)                             $      576.0    $      662.4    $      728.6    $      772.4
Depreciation                                            $       60.0    $       69.0    $       75.9    $       80.5
 Total operating costs                                  $      636.0    $      731.4    $      804.5    $      852.8
Earning before int. & tax                               $      164.0    $      188.6    $      207.5    $      219.9

Partial Balance Sheets for December 31 (Millions of Dollars)
                                                               Actual       Projected       Projected       Projected
Operating Assets                                                2010            2011            2012            2013
Cash                                                    $        8.0    $        9.2    $       10.1    $       10.7
Accounts receivable                                     $       80.0    $       92.0    $      101.2    $      107.3
Inventories                                             $      160.0    $      184.0    $      202.4    $      214.5
Net plant and equipment                                 $      600.0    $      690.0    $      759.0    $      804.5

Operating Liabilities
Accounts Payable                                        $       16.0    $       18.4    $       20.2    $       21.5
Accruals                                                $       40.0    $       46.0    $       50.6    $       53.6


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 (i.e., the same as the constant growth rate in sales) by the end of the forecast period.
                                                                Actual   Projected       Projected       Projected
Calculation of FCF                                                2010         2011            2012           2013
Operating current assets                                        248.0         285.2           313.7         332.5
Operating current liabilities                                    56.0          64.4            70.8          75.1
Net operating working capital                                   192.0         220.8           242.9         257.5
Net PPE                                                         600.0         690.0           759.0         804.5
Net operating capital                                           792.0         910.8         1,001.9       1,062.0
NOPAT                                                            98.4         113.2           124.5         131.9
Investment in operating capital                                na             118.8            91.1          60.1
Free cash flow                                                 na              (5.6)           33.4          71.8
Growth in FCF                                                  na           na             -692.1%         115.1%
Growth in sales                                                              15.0%           10.0%           6.0%


c. Calculate operating profitability (OP=NOPAT/Sales), capital requirements (CR=Operating capital/Sales), and return
on invested capital (ROIC=NOPAT/Operating capital at beginning of year). Based on the spread between 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)?
c. Calculate operating profitability (OP=NOPAT/Sales), capital requirements (CR=Operating capital/Sales), and return
on invested capital (ROIC=NOPAT/Operating capital at beginning of year). Based on the spread between 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)?

                                                            Actual     Projected     Projected      Projected
                                                             2010          2011          2012           2013
Operating profitability
  (OP=NOPAT/Sales)                                           12.3%        12.3%         12.3%          12.3%
Capital requirement
  (CR=Operating capital/Sales)                               99.0%        99.0%         99.0%          99.0%
Return on invested capital
  (ROIC=NOPAT/Operating capital at
  start of year)                                            na            14.3%         13.7%          13.2%
Weighted average cost of capital (WACC)                     na            10.5%         10.5%          10.5%
Spread between ROIC and WACC                                na             3.8%          3.2%           2.7%
Yes, because the spread is positive, the company should have a positive MVA.


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 the annual growth rate beyond the
horizon is 6 percent.)
                                                            Actual     Projected     Projected      Projected
                                                             2010          2011          2012           2013
Free cash flow                                                              (5.6)         33.4          71.8
Long-term constant growth in FCF
Weighted average cost of capital (WACC)                      10.5%        10.5%         10.5%          10.5%
Horizon value
FCF in Years 1-3 and FCF4 + horizon value in Year 4                         (5.6)         33.4          71.8
Value of operations (PV of FCF + HV)                       1,329.6

Operating capital                                            792.0

Market value added (MVA=Market value of
company - book value of company = Value of
operations - Operating capital)                              537.6

e. Calculate the price per share of common equity as of 12/31/2010.

                                                            Actual
                                                             2010
Value of Operations                                        1,329.6
Plus Value of Mkt. Sec.                                       20.0
Total Value of Company                                     1,349.6
Less Value of Debt                                           340.0
Less Value of Pref.                                           15.0
Value of Common Equity                                       994.6
Divided by number of shares                                     10
Price per share                                               99.5
                  4/11/2010




ces. The most recent




                        2010
              $         16.0
                        40.0
                        40.0
              $         96.0
              $        300.0
              $         15.0

              $        257.0
                       200.0
              $        457.0
              $        868.0




                  Projected
                      2014
                         6%
                        72%
                        10%
                       1%
                      10%
                      20%
                      75%
                       2%
                       5%
                      40%
                    10.5%

flow.



                  Projected
                      2014
              $    1,137.1
              $      818.7
              $       85.3
              $      904.0
              $      233.1



                  Projected
                      2014
              $       11.4
              $      113.7
              $      227.4
              $      852.8


              $       22.7
              $       56.9


flow each year to ensure
 forecast period.
                  Projected
                      2014
                     352.5
                      79.6
                     272.9
                     852.8
                   1,125.7
                     139.9
                      63.7
                      76.1
                      6.0%
                      6.0%


pital/Sales), and return
 between ROIC and
value of company - book
pital/Sales), and return
 between ROIC and
value of company - book


                Projected
                    2014

                   12.3%

                   99.0%


                   13.2%
                   10.5%
                    2.7%



 of the forecast period,
l growth rate beyond the


                Projected
                    2014
                     76.1
                     6.0%
                   10.5%
                  1,793.6
                  1,869.7

								
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