Use the financial statements shown below to answer the next three questions. Dol
ID: 2818248 • Letter: U
Question
Use the financial statements shown below to answer the next three questions. Dollars are in millions. Free cash flow is expected to grow at 4 percent after 2019. The weighted average cost of capital is 8.00 percent. The bonds are currently selling at 98% of par. The preferred stock has a current market value of $9 million.
Balance Sheet
Actual
2018
Projected
2019
Actual
2018
Projected
2019
Cash
7.0
10.0
Accounts payable
90.0
108.0
Marketable securities
3.0
2.0
Notes payable
51.5
67.0
Accounts Receivable
150.0
180.0
Accruals
60.0
72.0
Inventory
200.0
180.0
Total current liabilities
201.5
247.0
Total Current Assets
360.0
372.0
Long term bonds
150.0
150.0
Preferred Stock
10.0
10.0
Common stock (par + PIC)
40.0
40.0
Retained earnings
208.5
225.0
Net fixed assets
250.0
300.0
Total common equity
248.5
265.0
Total assets
610.0
672.0
Total liabilities & equity
610.0
672.0
Income Statement
Actual 2018
Projected 2019
Sales
1,000.0
1,200.0
Operating expenses
850.0
1020.0
Depreciation
25.0
30.0
Earnings before interest & taxes
125.0
150.0
Interest
20.2
21.7
Earnings before taxes
104.8
128.3
Taxes (40% rate)
41.9
51.3
Net income before preferred dividends
62.9
77.0
Preferred dividends
0.5
0.5
Net Income available for common
62.4
76.5
Common dividends
3.9
60
Addition to retained earnings
58.5
16.5
Number of shares
75 million
75 million
7. What is the free cash flow for 2019?
8. What is the value of operations as of 2018?
9. What is the price per share for 2018?
Actual
2018
Projected
2019
Actual
2018
Projected
2019
Cash
7.0
10.0
Accounts payable
90.0
108.0
Marketable securities
3.0
2.0
Notes payable
51.5
67.0
Accounts Receivable
150.0
180.0
Accruals
60.0
72.0
Inventory
200.0
180.0
Total current liabilities
201.5
247.0
Total Current Assets
360.0
372.0
Long term bonds
150.0
150.0
Preferred Stock
10.0
10.0
Common stock (par + PIC)
40.0
40.0
Retained earnings
208.5
225.0
Net fixed assets
250.0
300.0
Total common equity
248.5
265.0
Total assets
610.0
672.0
Total liabilities & equity
610.0
672.0
Explanation / Answer
NOPAT = EBIT × (1 - tax rate)
= $150 × (1 - 40%)
= $90 million.
NOPAT of firm is $90 million.
Change in working capital = ($372 - $247) - ($360 - $201.50)
= $125 - $158.50
= -$33.50
Change in working capital is -$33.50.
Capex in year 2019 = ($300 - $250) + $30
= $50 + $30
= $80
Capex in year 2019 is $80 million.
7.
Free cash flow = NOPAT + Depreciation - Change in working capital - Capex
= $90 + $30 - (-$33.50) - $80
= $73.50
Free cash flow in year 2019 is $73.50.
8.
value of operation = Free cash flow / WACC
= $73.50 / 8%
= $918.75
Value of operation is $918.75.
9.
Value of equity = value of operation - value of debt - value of preference
= $918.75 - ($150 × 98%) - $9
= $918.75 - $147 - $9
= $762.75
Value of equity is $762.75.
Share Price = Value of equity / Share outstanding
= $762.75 / 75
= $10.17.
Share price of company is $10.17.
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