1. Exhibit presents free cash flow and economic profit 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?
2. Since growth is stable for ApparelCo, you decide to start the continuing value with year 3 cash flows (i.e., cash flows in year 3 and beyond arc C011811 10 13 ApparelCo: Free Cash Flow and Economic Profit Forecasts
|
Today |
Year 1 |
Year 2 |
Year 3 |
Year 4 |
Year 5 |
|
|
| Contiauing |
| Value |
| Resource |
260 |
285 |
290.9 |
297.8 |
315.8 |
334.5 |
354.6 |
| Operating Cost |
225 |
238.5 |
252.8 |
268 |
284.1 |
301.1 |
319.2 |
| Operating profits |
25 |
28.5 |
28.1 |
29.8 |
31.6 |
33.5 |
36.5 |
|
|
|
|
|
|
|
|
| Operating tzocs |
6.3 |
6.6 |
7 |
7.4 |
7.9 |
8.4 |
8.9 |
| NOPLAT |
18.8 |
19.9 |
21.1 |
22.3 |
23.7 |
25.1 |
26.6 |
|
|
|
|
|
|
|
|
| Not inverstement |
|
8 |
8.4 |
8.8 |
9.6 |
10 |
|
| Free cash flow |
|
11.9 |
12.6 |
13.4 |
14.2 |
15.1 |
|
|
|
|
|
|
|
|
|
| Economics profit |
|
|
|
|
|
|
|
| NOPLAT |
|
19.9 |
211 |
223 |
237 |
261 |
36 |
| Invested capital |
|
132.5 |
140.5 |
148.9 |
157.8 |
167.8 |
177.3 |
| x Cost of capital(percent) |
|
10 |
10 |
10 |
10 |
10 |
10 |
| Capital charge |
|
13.3 |
14 |
14.9 |
15.8 |
16.7 |
17.7 |
|
|
|
|
|
|
|
|
| Economics profit |
|
66 |
70 |
74 |
78 |
84 |
89 |
part of the continuing value). Using the key value driver formula (and data provided in Question 1), what is the continuing value as of year 2? 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? How do these percentages compare to Question 1?