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Financial Management Theory and Practice- CH13 P11 Build a Model The Henley Corporation is a privately held company-ANSWER KEY (INSTANT DOWNLOAD)

Financial Management Theory and Practice- CH13 P11 Build a Model The Henley Corporation is a privately held company-ANSWER KEY (INSTANT DOWNLOAD)
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CH13 P11 Build a Model The Henley Corporation is a privately held company specializing in lawn care 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 Dividends per share $ 3.11 Balance Sheet for December 31 (Millions of Dollars) 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 2010 Sales growth rate Costs/Sales 72% Depreciation/Net PPE 10 Cash/Sales 1 Projected 2011 Sales growth rate 15% Costs/Sales 72 Depreciation/Net PPE 10 Cash/Sales 1 2012 Sales growth rate 10% Costs/Sales 72 Depreciation/Net PPE 10 Cash/Sales 1 2013 Sales growth rate 6% Costs/Sales 72 Depreciation/Net PPE 10 Cash/Sales 1 2014 Sales growth rate 6% Costs/Sales 72 Depreciation/Net PPE 10 Cash/Sales 1 Actual 2010 Accounts receivable/Sales 10% Inventories/Sales 20 Net PPE/Sales 75 Accounts payable/Sales 2 Accrual Sales 5 Tax rate 40 Weighted Average cost of capital (WACC) 10.5 Projected 2011 Accounts receivable/Sales 10% Inventories/Sales 20 Net PPE/Sales 75 Accounts payable/Sales 2 Accrual Sales 5 Tax rate 40 Weighted Average cost of capital (WACC) 10.5 Projected 2012 Accounts receivable/Sales 10% Inventories/Sales 20 Net PPE/Sales 75 Accounts payable/Sales 2 Accrual Sales 5 Tax rate 40 Weighted Average cost of capital (WACC) 10.5 Projected 2013 Accounts receivable/Sales 10% Inventories/Sales 20 Net PPE/Sales 75 Accounts payable/Sales 2 Accrual Sales 5 Tax rate 40 Weighted Average cost of capital (WACC) 10.5 Projected 2014 Accounts receivable/Sales 10% Inventories/Sales 20 Net PPE/Sales 75 Accounts payable/Sales 2 Accrual Sales 5 Tax rate 40 Weighted Average cost of capital (WACC) 10.5 A. Forecast the parts of the income statement and balance sheet that are necessary for calculating free cash flow. B. Calculate free cash flow for each projected year. Also calculate the growth rates of free cash flow each year to ensure that there is constant growth (that is, the same as the constant growth rate in sales) by the end of the forecast period. C. Calculate operating profitablility (OP + NOPAT/Sales), capital requirements (CR = Operating capital/Sales), and expected return on invested capital (EROIC = Expected NOPAT/Operating capital at beginning of year). Based on the spread between EROIC and 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 at the end of the forecast period, which is equal to the value of operations at the end of the forecast period.) Assume that the annual growth rate beyond the horizon is 6%. E: Calculate the price per share of common equity as of 12/31/2010.

 

FILE: MS EXCEL

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