Financial Modeling Assignment

Problem Set: Interco and Jones Electric Case

Question 1: Using the assumptions listed in the top half of Table 12 (use the "Total" column), project EBIT for Interco for 1989-1998. Use the following inputs
• 1988 Sales are reported in Exhibit 8.

• As indicated in Table 12, operating margins are projected to be 9.2% in year 1989, 9.3% in 1990,... 10.00% in 1997, 10.10% in 1998. (Assume operating margins include depreciation expense)

• Other income and corporate expenses will remain the same in 1989-1998 as they are in 1988 (see Exhibit 8).

• Be sure to read footnotes (a)-(d) in Table 12.

Question 2: Using the assumptions listed in the top half of Table 12 (use the "Total" column), project FCF for Interco for 1989-1998. Use the following inputs

• Tax rate is 41%

• Assume that CAPEX=Depreciation

• As mentioned in footnote d, working capital increases by 11.6% of the change in sales (i.e. Δ???????????????????? ∗ 11.6%) from 1994 onwards. Working capital is assumed to remain unchanged before 1994.

• Cash flows occur at the end of the year

Question 3: Reconstruct the stock price table in the lower half of Table 12. Use the following assumptions:

• Terminal/Continuing Value in year 10 is (CF in 10)*Terminal Multiple.

• WACC and Terminal Multiple assumptions are in the table

• Number of Shares = 37.5 million.

• Net Debt is 318.5M (from adjustment in exhibit 9). (As mentioned in Exhibit 9 this is NET Debt)

• NOTE your numbers should be roughly within $1-2 of the numbers reported in Table 12.

(If you're finding your numbers differ by more than $1-2 that is fine too. You may have used a different set of assumptions. There are multiple acceptable answers here)

Question 4: Create a stock price table similar to Table 12 where you instead model the terminal value as a growing perpetuity. Choose terminal growth rates you feel seem reasonable.

Question 5: Calculate FCF for the Jones Electric Case. Make the following assumptions

• Net working capital consists of accounts receivables, accounts payables, inventory, and accrued expenses

• When calculating taxes to get from EBIT to NOPAT, use the tax rate times EBIT rather than the actual taxes paid by Jones Electric (we will discuss this in class)

• Assume sales growth of 1%

Question 6: Calculate the Equity Value of Jones Electric

• Assume a terminal growth rate of 2%
• Assume a WACC of 10%

Question 7: Calculate the Equity Value of Jones Electric if it's sales grows at a rate of 20%. What's going on here? Does your estimate seem reasonable? Explain.