Johnson Company Income Statement 2010 2009 Net Sales 120 110 Costs (except depre

Question

Johnson Company Income Statement 2010 2009 Net Sales 120 110 Costs (except depreciation) 90 82 Depreciation 6 5.6    Total Operating Costs 96 87.6 Earnings before Interest and Taxes (EBIT) 24 22.4    Less Interest 4.8 4.4 Earnings before Taxes (EBT) 19.2 18     Taxes 35% 6.7 6.3 Net Income 12.5 11.7 Balance Sheet Assets Cash 6.0 5.50 Marketable securities 12.0 11.20 Accounts Receivable 18.0 16.00 Inventories 24.0 21.30    Total Current Assets 60.0 54.00 Net Plant & Equipment 60.0 56.00 Total Assets 120.0 110.00 Liabilities & Equity Accounts Payable 10.0 9.00 Notes Payable 28.0 25.00 Accruals 6.0 6.00    Total Current Liabilities 44.0 40.00 Long -term Bonds 35.0 31.00 Common Stock 25.0 25.00 Retained Earnings 16.0 14.00    Common Equity 41.0 39.00 Total Liabilities and Equity 120.0 110.00 From the above financial statements, calculate Johnson Company's Free Cash Flow for 2010. Johnson Co. has never paid a dividend. Its Free Cash Flow is expected to grow at a constant 6%. The WACC is 11%. Calculate Johnson's value of operations. {Vop = PV of expected FCF} Johnson Company Income Statement 2010 2009 Net Sales 120 110 Costs (except depreciation) 90 82 Depreciation 6 5.6    Total Operating Costs 96 87.6 Earnings before Interest and Taxes (EBIT) 24 22.4    Less Interest 4.8 4.4 Earnings before Taxes (EBT) 19.2 18     Taxes 35% 6.7 6.3 Net Income 12.5 11.7 Balance Sheet Assets Cash 6.0 5.50 Marketable securities 12.0 11.20 Accounts Receivable 18.0 16.00 Inventories 24.0 21.30    Total Current Assets 60.0 54.00 Net Plant & Equipment 60.0 56.00 Total Assets 120.0 110.00 Liabilities & Equity Accounts Payable 10.0 9.00 Notes Payable 28.0 25.00 Accruals 6.0 6.00    Total Current Liabilities 44.0 40.00 Long -term Bonds 35.0 31.00 Common Stock 25.0 25.00 Retained Earnings 16.0 14.00    Common Equity 41.0 39.00 Total Liabilities and Equity 120.0 110.00 From the above financial statements, calculate Johnson Company's Free Cash Flow for 2010. Johnson Co. has never paid a dividend. Its Free Cash Flow is expected to grow at a constant 6%. The WACC is 11%. Calculate Johnson's value of operations. {Vop = PV of expected FCF}

Explanation / Answer

Free cah flow to firm= EBIT*(1-tax rate)+ Depreciation- change in net working capital-capital expenditure

Net working capital in 2010=Current assets-current liability
=(60-44)=16

Net working capital in 2009=Current assets-current liability
=(54-40)=14
change in net working capital=16-14=2

Capital expenditure= net plant and equipment change=60-56=4
=24*(1-.35)+6-2-4
=$15.6

Value of operation=15.6*(1+6%)/(11-6)
=$330.72

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