Assignment
"Keith Clarkson, sole owner and president of the Clarkson Lumber Company, has received a number of informal inquiries from large, nationally-recognized building materials distributors about purchasing his company. Although Clarkson relishes operating his own business the would be interested if an attractive offer were received. Unfortunately, Mr. Clarkson is unsure how much his company is worth so he turns to you for guidance.
Your end goal is to value Clarkson Lumber operations at the beginning of 1996 (i.e. at the end of 1995) assuming the firm will obtain a credit line at Northwestern National Bank sufficiently large to take advantage of discounts on purchases for paying within 10 days of invoice, thus increasing operating profit margins.
With higher mark-ups and continued operating expense controls, Clarkson projects a steady operating profit margin of 6% by 2000. Margins and investment requirements will also stabilize in relation to sales growth. Relevant projection inputs are in the table below and the discount rate is 11.5%.
Note that the forecast ratios already include the benefit the of the 2% trade discounts.
For simplicity, use a tax rate of 35% throughout the projections.
Make whatever other reasonable assumptions are necessary to complete your analysis and explain the rationale for each."
| Projection Assumptions |
avg 93-95 |
1996 |
1997 |
1998 |
1999 |
2000 |
| Sales |
|
5,500 |
|
|
|
|
| Sales growth rate |
24.5% |
21.7% |
20% |
15% |
10% |
5% |
| CGS/Sales |
75.6% |
75.0% |
74.0% |
74.0% |
74.0% |
74.0% |
| Op Exp/Sales |
20.9% |
20.4% |
20.0% |
20.0% |
20.0% |
20.0% |
| OPM |
3.5% |
4.6% |
6.0% |
6.0% |
6.0% |
6.0% |
| Tax rate |
20.5% |
35% |
35% |
35% |
35% |
35% |
| |
|
|
|
|
|
|
| AR DOH (= AR/daily sales) |
43.4 |
43.4 |
43.4 |
43.4 |
43.4 |
43.4 |
| Inv DOH (=inventory/daily COGS) |
59.4 |
59.4 |
59.4 |
59.4 |
59.4 |
59.4 |
| NFATO (@Sales) (= sales/NFA) |
12.5 |
12.5 |
12.5 |
12.5 |
12.5 |
12.5 |
| AP DOH (AP/daily purchases) |
39.7 |
10 |
10 |
10 |
10 |
10 |
| Acc Exp/Sales |
1.46% |
1.46% |
1.46% |
1.46% |
1.46% |
1.46% |
1 - Project free cash flows for the next five years, 1996 to 2000 (please refer to video 25 to get the FCF in 1996)
2 - Use the same assumptions as in 2000 in order to compute the FCF of 2001, 2002 and 2003. Then, see if they follow a constant growth pattern.
3 - Compute the present value of the cash flows from 1996 to 2000, at the end of 1995.
4 - Compute the present value of all the cash flows starting in 2001, at the end of 1995.
5 - Compute the value of the firm operations.