2012

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 $
Assets 2012 Liabilities and Equity
Cash 8.0 $ Accounts Payable
Marketable Securities 20.0 Notes payable
Accounts receivable 80.0 Accruals
Inventories 160.0 Total current liabilities
Total current assets 268.0 $ Long-term bonds
Net plant and equipment 600.0 Preferred stock
Total Assets 868.0 $
Retained earnings
Common equity
Total liabilities and equity
Inputs Actual Projected Projected Projected
2012 2013 2014 2015
Sales Growth Rate 15% 10% 6%
Costs / Sales 72% 72% 72% 72%
Depreciation / Net PPE 10% 10% 10% 10%
Balance Sheets for December 31 (Millions of Dollars)
Common Stock
(Par plus PIC)
Projected ratios and selected information for the current and projected years are shown below.
Chapter 11. Student Ch 11-11 Build a Model
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)
Cash / Sales 1% 1% 1% 1%
Acct. Rec. / Sales 10% 10% 10% 10%
Inventories / Sales 20% 20% 20% 20%
Net PPE / Sales 75% 75% 75% 75%
Acct. Pay. / Sales 2% 2% 2% 2%
Accruals / Sales 5% 5% 5% 5%
Tax rate 40% 40% 40% 40%
Weighted average cost of capital (WACC) 10.5% 10.5% 10.5% 10.5%
Actual Projected Projected Projected
2012 2013 2014 2015
Net Sales 800.0 $ 920.0 $ 1,012.0 $ 1,072.7 $
Costs (except depreciation) 576.0 $ 662.4 $ 728.6 $ 772.4 $
Depreciation 60.0 $ 69.0 $ 75.9 $ 80.5 $
Total operating costs 636.0 $ 731.4 $ 804.5 $ 852.8 $
Earning before int. & tax 164.0 $ 188.6 $ 207.5 $ 219.9 $
Actual Projected Projected Projected
Operating Assets 2012 2013 2014 2015
Cash 8.0 $ 9.2 $ 10.1 $ 10.7 $
Accounts receivable 80.0 $ 92.0 $ 101.2 $ 107.3 $
Inventories 160.0 $ 184.0 $ 202.4 $ 214.5 $
Net plant and equipment 600.0 $ 690.0 $ 759.0 $ 804.5 $
Operating Liabilities
Accounts Payable 16.0 $ 18.4 $ 20.2 $ 21.5 $
Accruals 40.0 $ 46.0 $ 50.6 $ 53.6 $
Actual Projected Projected Projected
Calculation of FCF 2012 2013 2014 2015
Operating current assets 248.0 285.2 313.7 332.5
Operating current liabilities 56.0 64.4 70.8 75.1
Net operating working capital 192.0 220.8 242.9 257.5
Net PPE 600.0 690.0 759.0 804.5
Net operating capital 792.0 910.8 1,001.9 1,062.0
NOPAT 98.4 113.2 124.5 131.9
Investment in operating capital na 118.8 91.1 60.1
Free cash flow na (5.6) 33.4 71.8
Growth in FCF na na -692.1% 115.1%
Growth in sales 15% 10% 6%
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 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)?
Partial Income Statement for the Year Ending December 31 (Millions of Dollars)
Partial Balance Sheets for December 31 (Millions of Dollars)
Actual Projected Projected Projected
2012 2013 2014 2015
Operating profitability
(OP=NOPAT/Sales) 12.3% 12.3% 12.3% 12.3%
Capital requirement
(CR=Operating capital/Sales) 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%
Weighted average cost of capital (WACC) na 10.5% 10.5% 10.5%
Spread between ROIC and WACC na 3.8% 3.2% 2.7%
Yes, the company should have a positive market value added because the spread is positive (ROIC > WACC).
Actual Projected Projected Projected
2012 2013 2014 2015
Free cash flow (5.6) 33.4 71.8
Long-term constant growth in FCF
Weighted average cost of capital (WACC) 10.5% 10.5% 10.5% 10.5%
Horizon value
FCF in Years 1-3 and FCF4 + horizon value in Year 4 (5.6) 33.4 71.8
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
Actual
2012
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
e. Calculate the price per share of common equity as of 12/31/2012.
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)?
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.)
2/1/2012
2012
16.0 $
40.0
40.0
96.0 $
300.0 $
15.0 $
257.0 $
200.0
457.0 $
868.0 $
Projected
2016
6%
72%
10%
Balance Sheets for December 31 (Millions of Dollars)
Projected ratios and selected information for the current and projected years are shown below.
Chapter 11. Student Ch 11-11 Build a Model
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)
1%
10%
20%
75%
2%
5%
40%
10.5%
Projected
2016
1,137.1 $
818.7 $
85.3 $
904.0 $
233.1 $
Projected
2016
11.4 $
113.7 $
227.4 $
852.8 $
22.7 $
56.9 $
Projected
2016
352.5
79.6
272.9
852.8
1,125.7
139.9
63.7
76.1
6.0%
6%
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 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)?
Partial Income Statement for the Year Ending December 31 (Millions of Dollars)
Partial Balance Sheets for December 31 (Millions of Dollars)
Projected
2016
12.3%
99.0%
13.2%
10.5%
2.7%
Yes, the company should have a positive market value added because the spread is positive (ROIC > WACC).
Projected
2016
76.1
6.0%
10.5%
1,793.6
1,869.7

e. Calculate the price per share of common equity as of 12/31/2012.
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)?
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.)