Discounted Cash Flow Valuation: General Mills, Inc.
At the beginning of its fiscal year 2006, an analyst made the following forecastfor GeneralMills, Inc., the consumer foods company, for 2006-2009 (in millions ofdollars):
2005 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 of9 percent to calculate both the enterprise value and equity value for General Mills at the beginning of2006 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:
Free Cash Flow for Kimberly-Clark Corporation
Below are summary numbers from reformulated balance sheets for 2007 and 2006 forKimberly-Clark Corporation, the paper product s company, along with numbers from thereformulated income statement for 2007 (in millions of dollars).
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2007
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2006
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Operating assets
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$18, 057.0
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$16,796.2
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Operating liabilities
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6 , 011.8
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5,927.2
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Financial assets
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382.7
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270.8
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Financial obligations
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6,496.4
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4,395.4
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Operating income (after tax)
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$2,740.1
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Net financial expense (after tax)
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147.1
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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 flowstatement and also reported net interest payments of $142.4 million. It reported $898million in cash spent on investing activities, but this was after including a net $56 millionfrom liquidating short-term interest-bearing securities. The firm's statutory taxrate is 36.6 percent. Calculate free cash flow from these reported numbers.
Harvard style reference