Question
Build a financial model on the following template. Assume that the WACC is 20%. Also assume the debt and equity remain the same. The FCF long-term growth rate is the same as the sales growth rate. ( Copy the table into Excel.)
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Sales growth
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10%
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Current assets/sales
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15%
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Current liabilities/Sales
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8%
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Net fixed assets/sales
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77%
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cost of goods sold/sales
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50%
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depreciation rate
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10%
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interest rate on debt
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10%
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interest paid on cash and marketable securities
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8%
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tax rate
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40%
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dividend payout ratio
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40%
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Year
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0
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1
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2
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3
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4
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5
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income statement
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sales
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1000
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cost of goods sold
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500
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interest payment on debt
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32
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interest earned on cash and marketable securities
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6
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depreciation
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100
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profits before tax
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374
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taxes
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150
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profits after tax
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225
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dividends
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90
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retained earnings
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135
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Balance sheet
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cash and marketable securities
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80
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current assets
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150
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fixed assets
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At cost
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1070
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depreciation
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300
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Net fixed assets
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770
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total assets
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1000
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current liabilities
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80
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debt
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320
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stock
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450
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accumulated retained earnings
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150
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total liabilities + Equity
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1000
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a. Value the company's equity. (SHOW YOUR WORK ON EXCEL)
b. The model in Part A includes cost of goods sold but not selling, general, and administrative (SG & A) expenses. Suppose that the firm has $200 of these expenses each year, irrespective of the level of sales. Change the model to accommodate this new assumption. Show the resulting income statements, balance sheets, the free cash flows (FCF), and the valuation. (SHOW YOUR WORK ON EXCEL)
c. Build a data table in which you show the sensitivity of the equity value to the level of SG & A. Let SG & A vary from $0 per year to $600 per year. (SHOW YOUR WORK ON EXCEL)
d. Back to Part A. Suppose that the fixed assets at cost follow the following step function:
Incorporate this function into the model and solve for the market value of equity. (SHOW YOUR WORK ON EXCEL)
e. Back to Part A again. Make two changes in the model: 1). Let debt be the plug and keep cash constant at its year-0 level. 2). Suppose that the firm has 1,000 shares and that it decides to pay, in year 1, a dividend per share of $0.15. In addition, suppose that it wants this dividend per share to growth in subsequent years by 12% per year. Incorporate these changes into the pro forma model and solve this model to get the market value of equity per share. (SHOW YOUR WORK ON EXCEL)