Rose has been hired as an analyst to value a potential acquisition target - Henl
ID: 2786001 • Letter: R
Question
Rose has been hired as an analyst to value a potential acquisition target - Henley Corporation, which is a privately held company specializing in lawn care products and services. The most recent financial statements are shown below. Use the data to complete the questions listed on the next page. |Income statement (in million) 2016 Balance Sheet (in million) 2016 $ Net Sales Costs (except depreciation) Depreciation Total operating costs Earning before int. & tax | Less interest Earning before taxes | Taxes Net income before pref. div. Preferred div. Net income avail. for com. div. Common dividends Addition to retained earnings 800.0 $ 576.0 $ 60.0 $ 636.0 164.0 $ 32.0 132.0 $ 52.8 $ 79.2 $ 1.4 $ 77.9 $ 31.1 $ 46.7 Cash Accounts receivable Inventories Short-term Investment Total current assets Net plant and equipment Total Assets 8.0 80.0 160.0 20.0 268.0 600.0 $ 868.0 16.0 40.0 40.0 96.0 300.0 $ 15.0 Number of shares (in millions) Dividends per share Accounts Payable Accruals Notes Payable Total current liabilities Long-term bonds Preferred stock Common Stock (Par plus PIC) Retained earnings Shareholder's equity Total liabilities and equity 10 $ 3.11 257.0 200.0 $ 457.0 $ 868.0Explanation / Answer
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) 2010 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 Balance Sheets for December 31 (Millions of Dollars) Assets 2010 Liabilities and Equity 2010 Cash $ 8.0 Accounts Payable $ 16.0 Marketable Securities 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 $ 15.0 Total Assets $ 868.0 Common Stock (Par plus PIC) $ 257.0 Retained earnings 200.0 Common equity $ 457.0 Total liabilities and equity $ 868.0 Projected ratios and selected information for the current and projected years are shown below. Inputs Actual Projected Projected Projected Projected 2010 2011 2012 2013 2014 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% Inventories / Sales 20% 20% 20% 20% 20% Net PPE / Sales 75% 75% 75% 75% 75% Acct. Pay. / Sales 2% 2% 2% 2% 2% Accruals / Sales 5% 5% 5% 5% 5% Tax rate 40% 40% 40% 40% 40% Weighted average cost of capital (WACC) 10.5% 10.5% 10.5% 10.5% 10.5% 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 2010 2011 2012 2013 2014 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 Total operating costs $ 636.0 $ 731.4 $ 804.5 $ 852.8 $ 904.0 Earning before int. & tax $ 164.0 $ 188.6 $ 207.5 $ 219.9 $ 233.1 Partial Balance Sheets for December 31 (Millions of Dollars) Actual Projected Projected Projected Projected Operating Assets 2010 2011 2012 2013 2014 Cash $ 8.0 $ 9.2 $ 10.1 $ 10.7 $ 11.4 Accounts receivable $ 80.0 $ 92.0 $ 101.2 $ 107.3 $ 113.7 Inventories $ 160.0 $ 184.0 $ 202.4 $ 214.5 $ 227.4 Current assets $ 248.0 $ 285.2 $ 313.7 $ 332.5 $ 352.5 Net plant and equipment $ 600.0 $ 690.0 $ 759.0 $ 804.5 $ 852.8 Operating Liabilities Accounts Payable $ 16.0 $ 18.4 $ 20.2 $ 21.5 $ 22.7 Accruals $ 40.0 $ 46.0 $ 50.6 $ 53.6 $ 56.9 Current Liabilities $ 56.0 $64.4 $70.8 $75.1 $79.6 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 2010 2011 2012 2013 2014 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 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 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% 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)? Actual Projected Projected Projected Projected 2010 2011 2012 2013 2014 Operating profitability (OP=NOPAT/Sales) 12.3% 12.3% 12.3% 12.3% 12.3% Capital requirement (CR=Operating capital/Sales) 99.0% 99.0% 99.0% 99.0% 99.0% Return on invested capital (ROIC=NOPAT/Operating capital at start of year) na 14.3% 13.7% 13.2% 13.2% Weighted average cost of capital (WACC) na 10.5% 10.5% 10.5% 10.5% Spread between ROIC and WACC na 3.8% 3.2% 2.7% 2.7% Yes, because the spread is positive, the company should have a positive MVA. 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.) Actual Projected Projected Projected Projected 2010 2011 2012 2013 2014 Free cash flow (5.6) 33.4 71.8 76.1 Long-term constant growth in FCF 6.0% Weighted average cost of capital (WACC) 10.5% 10.5% 10.5% 10.5% 10.5% Horizon value 1,793.6 FCF in Years 1-3 and FCF4 + horizon value in Year 4 (5.6) 33.4 71.8 1,869.7 Value of operations (PV of FCF + HV) 1,329.6 Operating capital 792.0 Market value added (MVA=Market value of company - book value of company = Value of operations - Operating capital) 537.6 e. Calculate the price per share of common equity as of 12/31/2010. Actual 2010 Value of Operations 1,329.6 Plus Value of Mkt. Sec. 20.0 Total Value of Company 1,349.6 Less Value of Debt 340.0 Less Value of Pref. 15.0 Value of Common Equity 994.6 Divided by number of shares 10 Price per share 99.5
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