Question
The following sheet presents the balance sheet and value drivers of Yummy Company, which manufactures a very special tomato sauce. (You might want to copy the table into Excel.)
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Yummy Company, Financial Model
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Value Drivers
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Sales growth
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12%
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Current assets/Sales
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22%
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Current liabilities/Sales
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20%
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Net fixed assets growth rate
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5%
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Cost of goods sold/sales
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45%
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Depreciation rate (of average fixed assets at cost)
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20%
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interest rate on debt
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8%
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interest earned on cash balances
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4%
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tax rate
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36%
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dividend payout ratio
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25%
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sales
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2000000
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WACC
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16%
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long term FCF growth rate
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4%
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Balance sheet
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Cash
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460000
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Current assets
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440000
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Fixed Assets
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At cost
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4000000
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Depreciation
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500000
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Net fixed assets
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3500000
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total assets
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4400000
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Current liabilities
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400000
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Debt
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3000000
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Stock (1500000 shares, issued at $0.5 each)
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750000
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accumulated retained earnings
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250000
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Total Liabilities + Equity
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4400000
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Additional model assumptions are as follows:
- The FCF evaluation is for a 5-year period. In addition, a terminal value should be determined using the long-term FCF growth rate.
- The debt principal repayments are $300,000 each year.
- Cash is a plug in the model.
a. Make a pro forma model for Yummy and computer the firm value using a DCF valuation model with year-end discounting.
b. Show in a graph the sensitivity of the enterprise value to the growth in sales;
c. Show in a graph the sensitivity of the enterprise value to the company's WACC.