Exhibit 10.13 presents free cash flow and economic forecasts for ApparelCo, a $2

Question

Exhibit 10.13 presents free cash flow and economic forecasts for ApparelCo, a $250 million company that produces men's clothing. ApparelCo is expected to grow revenues, operating profits, and free cash flow at 6 percent per year indefinitely. The company earns a return on new capital of 15 percent. The company's cost of capital is 10 percent. Using the key value driver formula, what is the continuing value as of year 5? Using discounted cash flow, what is the value of operations for ApparelCo? What percentage of ApparelCo's total value is attributable to the continuing value?

Exhibit 10.13 Today Year 1 Year 2 Year 3 Year 4 Year 5 Continuing Value Revenues $250.00 $265.00 $280.90 $297.80 $315.60 $334.60 $354.60 Operating Costs $(225.00) $(238.50) $(252.80) $(268.00) $(284.10) $(301.10) $(319.20) Operating Profit $25.00 $26.50 $28.10 $29.80 $31.60 $33.50 $35.50 Operating Taxes $(6.30) $(6.60) $(7.00) $(7.40) $(7.90) $(8.40) $(8.90) NOPLAT $18.80 $19.90 $21.10 $22.30 $23.70 $25.10 $26.60 Net Investment $-   $(8.00) $(8.40) $(8.90) $(9.50) $(10.00) $-   Free Cash Flow $-   $11.90 $12.60 $13.40 $14.20 $15.10 $-   Economic Profit $-   NOPLAT $-   $19.90 $21.10 $22.30 $23.70 $25.10 $26.60 Invested Capital $-   $132.50 $140.50 $148.90 $157.80 $167.30 $177.30 x Cost of Capital (percent) $-   $10.00 $10.00 $10.00 $10.00 $10.00 $10.00 Capital Charge $-   $13.30 $14.00 $14.90 $15.80 $16.70 $17.70 Economic Profit $-   $6.60 $7.00 $7.40 $7.90 $8.40 $8.90

Explanation / Answer

Continuing Value = 18.8 X 100 X [1-(6/15)]/(10-6)

= $ 94

Present Continuing value = 94/(1.06)^5

= $ 70.2

Value of Operations = 284.1/(1.06)^5

= $ 212.3

Percentage = 70.2/250 X 100 = 28.1 %

Related Questions

Navigate

• Browse (All)
• Browse E
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.