BA350 Financial Management: Ch15 P11 Build a Model - The Henley Corporation

BA350 Financial Management

15-11 Build a Model: Corporate Valuation

Start with the partial model in the file Ch15 P11 Build a Model.xls on the textbook’s Web site.

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 Except for Per Share Data)

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 2010

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

Total Assets $868.0 Common Stock (Par plus PIC) $257.0

Retained earnings 200.0

Common equity $457.0

Total liabilities and equity $868.0

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

Inputs Actual Projected Projected Projected Projected

2010 2011 2012 2013 2014

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%

Acct. Rec. / Sales 10% 10% 10% 10% 10%

Inventories / Sales 20% 20% 20% 20% 20%

Net PPE / Sales 75% 75% 75% 75% 75%

Acct. Pay. / 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 sheet that are necessary for calculating 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 EROIC 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 the annual growth rate beyond the horizon is 6%.

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