Income Statement Valuation Wo

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 Projected
Income Statement Items 2019/12/31 12/31/20 12/31/21 12/31/22 12/31/23
Net Sales $800.0
Costs (except depreciation) $576.0
Depreciation $60.0
Earning before int. & tax $164.0
Partial Balance Sheets for December 31 (Millions of Dollars)
Actual Projected Projected Projected Projected
Operating Assets 2019/12/31 12/31/20 12/31/21 12/31/22 12/31/23
Cash $8.0
Accounts receivable $80.0
Inventories $160.0
Net plant and equipment $600.0
Operating Liabilities
Accounts Payable $16.0
Accruals $40.0
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 Projected
Calculation of FCF 2019/12/31 12/31/20 12/31/21 12/31/22 12/31/23
Operating current assets
Operating current liabilities
Net operating working capital
Net PPE
Total net operating capital
NOPAT
Investment in total net operating capital na
Free cash flow na
Growth in FCF na na
Growth in sales
c. Calculate the return on invested capital (ROIC=NOPAT/Total net operating capital) and the growth rate in free cash flow. What is the ROIC in the last year of the forecast? What is the long-term constant growth rate in free cash flow (gL is the growth rate in FCF in the last forecast period because all ratios are constant)? Do you think that Hensley’s value would increase if it could add growth without reducing its ROIC? (Hint: Growth will add value if the ROIC > WACC/[1+WACC]). In the yellow space below, do you think that the company will have a value of operations greater than its total net operating capital? (Hint: Is ROIC > WACC/[1+gL]?)
Actual Projected Projected Projected Projected
2019/12/31 12/31/20 12/31/21 12/31/22 12/31/23
Return on invested capital
(ROIC=NOPAT/[Total net operating capital])
Weighted average cost of capital (WACC) 10.5% 10.5% 10.5% 10.5% 10.5%
WACC/(1+gL) na na na
WACC/(1+WACC) na na na
Answer:
d. Calculate the current value of operations. (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 equal to the growth rate at the horizon.) How does the current value of operations compare with the current amount of total net operating capital?
Weighted average cost of capital (WACC) 10.5%
Actual Projected Projected Projected Projected
2019/12/31 12/31/20 12/31/21 12/31/22 12/31/23
Free cash flow
Long-term constant growth in FCF
Horizon value (Terminal Value)
Present value of horizon value
Present value of forecasted FCF
Value of operations (]PV of HV] + [PV of FCF])
Total net operating capital
Answer:
e. Calculate the price per share of common equity as of 12/31/2019
Millions except price per share Actual
2019/12/31
Value of operations
+ Value of short-term investments
Total value of company
− Total value of all debt
− Value of preferred stock
Value of common equity
Divided by number of shares
Price per share

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