Chapter 13. 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)
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
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 (i.e., 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 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)?
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.)
e. Calculate the price per share of common equity as of 12/31/2010.