Start with the partial model in Ch07 P23 Build a Model.xlsx on the textbook’s Web site. Traver-Dunlap Corporation has a 15% weighted average cost of capital (WACC). Its most recent sales were $980 million and its total net operating capital is $870 million. The following table shows estimates of the forecasted growth rates, operating profitability ratios, and capital requirement ratios for the next 3 years. All of these ratios are expected to remain constant after the third year. Use this information to answer the following questions.
a. Use the data to forecast sales, net operating profit after taxes (NOPAT), total net operating capital (OpCap), free cash flow (FCF), growth rate in FCF, and return on invested capital (ROIC) for the next 3 years. What is the FCF growth rate for Year 3 and how does it compare with the growth rate in sales? What is the ROIC for Year 3 and how does it compare with the 15% WACC?
b. What is the value of operations at Year 3, Vop 3? What is the current value of operations, Vop 0? How does the value of operations at Year 0 compare with the total net operating working capital at Year 3, and what might explain this relationship?
c. Suppose the growth rates for Years 2, 3, and thereafter can be increased to 7%. What is the new value of operations? Did it go up or down? Why did it change in this manner?
d. Return the growth rates to the original values. Now suppose that the capital requirement ratio can be decreased to 60% for all 3 years and thereafter. What is the new value of operations? Did it go up or down relative to the original base case? Why did it change in this manner?
e. Leave the capital requirement ratios at 60% for all 3 years and thereafter, but increase the sales growth rates for Years 2, 3, and thereafter to 7%. What is the new value of operations? Did it go up or down relative to the other scenarios? Why did it change in this manner?
Ehrhardt, Michael C.; Brigham, Eugene F. (2016-01-01). Corporate Finance: A Focused Approach (Page 338). South-Western College Pub. Kindle Edition.