Assignment Questions -
Question 1: A Discounted Cash Flow Valuation: General Mills, Inc.
At the beginning of its fiscal year 2006, an analyst made the following forecast for General Mills, Inc., the consumer foods company, for 2006-2009 (in millions of dollars):
|
|
2006
|
2007
|
2008
|
2009
|
|
Cash flow from operations
|
2,014
|
2,057
|
2,095
|
2,107
|
|
Cash investment in operations
|
300
|
380
|
442
|
470
|
General Mills reported $6, 192 million in short-term and long-term debt at the end of 2005 but very little in interest-bearing debt assets. Use a required return of 9 percent to calculate both the enterprise value and equity value for General Mills at the beginning of 2006 under two forecasts for long-run cash flows:
a. Free cash flow will remain at 2009 levels after 2009.
b. Free cash flow will grow at 3 percent per year after 2009.
General Mills had 369 million shares outstanding at the end of 2005, trading at $47 per share. Calculate value per share and a value-to-price ratio under both scenarios.
a. The exercise involves calculating free cash flows, discounting them to present value, then adding the present value of a continuing value. For part (a) of the question, the continuing value has no growth.
Question 2: Free Cash Flow for Kimberly-Clark Corporation
Below are summary numbers from reformulated balance sheets for 2007 and 2006 for Kimberly-Clark Corporation, the paper product s company, along with numbers from the reformulated income statement for 2007 (in millions of dollars).
| |
2007
|
2006
|
|
Operating assets
|
$18, 057.0
|
$16,796.2
|
|
Operating liabilities
|
6 , 011.8
|
5,927.2
|
|
Financial assets
|
382.7
|
270.8
|
|
Financial obligations
|
6,496.4
|
4,395.4
|
|
Operating income (after tax)
|
$2,740.1
|
|
|
Net financial expense (after tax)
|
147.1
|
|
a. The net payout to shareholders (dividends and share repurchases minus share issues) in 2007 was $3,405.9 million. Calculate free cash flow using Method 1 and Method 2.
b. The firm reported cash flow from operation s of $2,429 million in its 2007 cash flow statement and also reported net interest payments of $142.4 million. It reported $898 million in cash spent on investing activities, but this was after including a net $56 million from liquidating short-term interest-bearing securities. The firm's statutory tax rate is 36.6 percent. Calculate free cash flow from these reported numbers.