Web site. The Henley Corporation is a privately held company specializing in lawncare products and services. The most recent financial statements are shown below.Income Statement for the Year Ending December 31 (Millions of Dollars Except for Per Share Data)
2010
Net sales $ 800.0
Costs (except depreciation) 576.0
Depreciation 60.0
Total operating costs $ 636.0
Earnings before interest and taxes $ 164.0
Less interest 32.0
Earnings before taxes $ 132.0
Taxes (40%) 52.8
Net income before preferred dividends $ 79.2
Preferred dividends 1.4
Net income available for common dividends $ 77.9
Common dividends $ 31.1
Addition to retained earnings $ 46.7
Number of shares (in millions) 10
Dividends per share $ 3.11
Balance Sheet for December 31 (Mi llions of Dol lars)
2010 2010
Assets Liabilities and Equity
Cash $ 8.0 Accounts payable $ 16.0
Marketable securities 20.0 Notes payable 40.0
Accounts receivable 80.0 Accruals 40.0
Inventories 160.0 Total current liabilities $ 96.0
Total current assets $268.0 Long-term bonds 300.0
Net plant and equipment 600.0 Preferred stock 15.0
Common stock (par plus PIC) 257.0
Retained earnings 200.0
Common equity $457.0
Total assets $868.0 Total liabilities and equity $868.0
Projected ratios and selected information for the current and projected years are
shown below.
Actual Projected
2010 2011 2012 2013 2014
Sales growth rate 15% 10% 6% 6%
Costs/Sales 72% 72 72 72 72
Depreciation/Net PPE 10 10 10 10 10
Cash/Sales 1 1 1 1 1
resource
Chapter 13: Corporate Valuation, Value-Based Management and Corporate Governance 553
9781133665007, Financial Management: Theory and Practice, Michael C. Ehrhardt - © Cengage Learning.
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Actual Projected
2010 2011 2012 2013 2014
Accounts receivable/Sales 10% 10% 10% 10% 10%
Inventories/Sales 20 20 20 20 20
Net PPE/Sales 75 75 75 75 75
Accounts payable/Sales 2 2 2 2 2
Accruals/Sales 5 5 5 5 5
Tax rate 40 40 40 40 40
Weighted average cost of
capital (WACC) 10.5 10.5 10.5 10.5 10.5
a. Forecast the parts of the income statement and balance sheet that are necessary forcalculating free cash flow.
b. Calculate free cash flow for each projected year. Also calculate the growth rates of freecash flow each year to ensure that there is constant growth (that is, the same as theconstant growth rate in sales) by the end of the forecast period.
c. Calculate operating profitability (OP = NOPAT/Sales), capital requirements (CR =Operating capital/Sales), and expected return on invested capital (EROIC = ExpectedNOPAT/Operating capital at beginning of year). Based on the spread betwe enEROICand WACC, do you think that the company will have a positive Market Value Added
(MVA = Market value of company - Book value of company = Value of operations -
Operating capital)?
d. Calculate the value of operations and MVA. (Hint: First calculate the horizon value atthe end of the forecast period, which is equal to the value of operations at the end ofthe forecast period.) Assume that the annual growth rate beyond the horiz