Build a Model Problem 11/26/18
Chapter: 12 Note to authors. Change income statement and balance sheets to be values (not formulas) when doing problem for students.
Problem: 11
2019
Net Sales 800.0$
Costs (except depreciation) 576.0$
Depreciation 60.0$
Earning before int. & tax 164.0$
Less interest 32.0$
Earning before taxes 132.0$
Taxes (25%) 33.0$
Net income before pref. div. 99.0$
Preferred div. 9.0$
Net income avail. for com. div. 90.0$
Common dividends 30.0$
Addition to retained earnings 60.0$
Number of shares (in millions) 10
Dividends per share 3.00$
Tax rate 25%
Assets 2019 Liabilities and Equity 2019
Cash 8.0$ Accounts Payable 16.0$
Short-term investments 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 100.0$
Total Assets 868.0$
257.0$
Retained earnings 211.0
Common equity 468.0$
Total liabilities and equity
868.0$
Inputs Actual Projected Projected Projected Projected
12/31/2019 12/31/20 12/31/21 12/31/22 12/31/23
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%
(Net PPE)/Sales 75% 75% 75% 75% 75%
(Acct. Pay.)/Sales 2% 2% 2% 2% 2%
Tax rate 40% 40% 40% 40% 40%
Weighted average cost of capital (WACC) 10.5% 10.5% 10.5% 10.5% 10.5%
Actual Projected Projected Projected Projected
Income Statement Items 12/31/2019 12/31/20 12/31/21 12/31/22 12/31/23
Net Sales $800.0 $920.0 $1,012.0 $1,072.7 $1,137.1
Costs (except depreciation) $576.0 $662.4 $728.6 $772.4 $818.7
Depreciation $60.0 $69.0 $75.9 $80.5 $85.3
Earning before int. & tax $164.0 $188.6 $207.5 $219.9 $233.1
Actual Projected Projected Projected Projected
Operating Assets 12/31/2019 12/31/20 12/31/21 12/31/22 12/31/23
Cash $8.0 $9.2 $10.1 $10.7 $11.4
Accounts receivable $80.0 $92.0 $101.2 $107.3 $113.7
Net plant and equipment $600.0 $690.0 $759.0 $804.5 $852.8
Accounts Payable $16.0 $18.4 $20.2 $21.5 $22.7
Actual Projected Projected Projected Projected
Calculation of FCF 12/31/2019 12/31/20 12/31/21 12/31/22 12/31/23
Operating current assets $248.0 $285.2 $313.7 $332.5 $352.5
Operating current liabilities $56.0 $64.4 $70.8 $75.1 $79.6
Net operating working capital $192.0 $220.8 $242.9 $257.5 $272.9
Net PPE $600.0 $690.0 $759.0 $804.5 $852.8
Total net operating capital $792.0 $910.8 $1,001.9 $1,062.0 $1,125.7
NOPAT $98.4 $113.2 $124.5 $131.9 $139.9
Investment in total net operating capital na $118.8 $91.1 $60.1 $63.7
Free cash flow na -$5.6 $33.4 $71.8 $76.1
Growth in FCF na na –692.1% 115.1% 6.0%
Growth in sales 15.0% 10.0% 6.0% 6.0%
Actual Projected Projected Projected Projected
12/31/2019 12/31/20 12/31/21 12/31/22 12/31/23
Return on invested capital
(ROIC=NOPAT/[Total net operating capital])
12.4% 12.4% 13.7% 13.2% 13.2%
Weighted average cost of capital (WACC) 10.5% 10.5% 10.5% 10.5% 10.5%
Weighted average cost of capital (WACC) 10.5%
Actual Projected Projected Projected Projected
12/31/2019 12/31/20 12/31/21 12/31/22 12/31/23
Free cash flow -$5.6 $33.4 $71.8 $76.1
Long-term constant growth in FCF 6.0%
Horizon value 1,793.6
Present value of horizon value $1,203.0
Present value of forecasted FCF $126.6
Value of operations (]PV of HV] + [PV of FCF]) $1,329.6
Total net operating capital $792.0
Millions except price per share Actual
12/31/2019
Value of operations $1,329.6
+ Value of short-term investments $20.0
Total value of company $1,349.6
Value of common equity $909.6
Divided by number of shares 10
Price per share $91.0
Partial Income Statement for the Year Ending December 31 (Millions of Dollars)
Partial Balance Sheets for December 31 (Millions of Dollars)
Start with the partial model in the file Ch12 P11 Build a Model.xlsx on the textbook’s Web site, which contains
Henley Corporation’s most recent financial statements. Use the following ratios and other selected information
for the current and projected years to answer the next questions.
Income Statement for the Year Ending December 31 (Millions of Dollars)
e. Calculate the price per share of common equity as of 12/31/2019
Balance Sheets for December 31 (Millions of Dollars)
Common Stock
(Par plus PIC)
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 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]). 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]?)
Projected ratios and selected information for the current and projected years are shown below.
The value of operations is greater than the total net operating capital because the ROIC is greater than
WACC/(1+gL).