Forecast Ideko's free cash flow (reproduce Table 19.10 assuming Ideko's market share will increase by 0.45...

Transcribed Image Text:

Forecast Ideko's free cash flow (reproduce Table 19.10 assuming Ideko's market share will increase by 0.45 percent per year; investment, financing, and depreciation will be adjusted accordingly; and the projected improvements in working capital occur (that is, ldeko's working capital requirements through 2010 will be as shown here). Ideko's pro-forma income statements for 2005-2010 are shown here, while its balance sheet for 2005 is shown here. Ideko's production plant will require an expansion in 2010 (when production volume will exceed the current level by 50%), and the cost of this expansion will be $15.2 million. This amount will be borrowed from a financial institution at an interest rate of 6.8%. The new projected capital investments are shown here. (Assume an income tax rate of 35%.) Calculate Ideko's free cash flow through 2010 below: (Round to the nearest $ 000.) Free Cash Flow ($ 000) Net Income Plus: After-tax Interest Expense Unlevered Net Income Plus: Depreciation Less: Increase in NWC Less: Capital Expenditures Free Cash Flow of Firm Plus: Net Borrowing Less: After-tax Interest Expense Free Cash Flow to Equity 2006 TABLE 19.10 SPREADSHEET Ideko's Free Cash Flow Forecast Year 2005 Free Cash Flow ($ 000) 1 Net Income 2 Plus: After-Tax Interest Expense 3 Unlevered Net Income 4 Plus: Depreciation 5 Less: Increases in NWC 6 Less: Capital Expenditures 7 Free Cash Flow of Fir 8 Plus: Net Borrowing 9 Less: After-Tax Interest Expense 10 Free Cash Flow to Equity 2006 2007 2008 (4,420) (4,420) 9,055 2009 5,193 6,247 8,382 10,545 5,304 6,960 4,420 4,420 4,420 5,083 9,613 10,667 11,380 5,405 (3,663) (4,089) (4,685) (5,231) 13,465 15,849 6,865 7,678 7,710 5,450 3,412 (5,000) (5,000) (20,000) (15,000) (8,000) 13,475 7,409 (5,845) 1,458 10,328 15,000 5,000 (5,083) (5,304) 1,375 5,024 (4,420) 2,989 4,735 2010 (Click on the following icon in order to copy its contents into a spreadsheet.) Ideko's Working Capital Requirements Working Capital Days Assets Accounts Receivable Raw Materials Finished Goods Minimum Cash Balance Liabilities Based on: Sales Revenue Raw Materials Costs Raw Materials + Labor Costs Sales Revenue Wages Payable Direct Labor + Admin Costs Other Accounts Payable Raw Materials + Sales and Marketing 2005 Days 90 45 45 30 15 45 > 2005 Days 60 30 45 30 15 45 Working Capital ($ 000) Assets Accounts Receivable Raw Materials Finished Goods Minimum Cash Balance Total Current Assets Labilities Wages Payable Other Accounts Payable Total Current Liabilities Net Working Capital Increase in Net Working Capital 2005 2006 19,003 14,136 1,935 1,425 4,185 4,698 6,334 7,068 31,457 27,327 1,323 3,372 4,695 26,762 2007 2008 2009 15,744 17,506 19,436 1,572 1,730 1,902 5,267 5,896 6,591 7,872 8,753 9,718 30,455 33,885 37,647 1,387 1,563 1,716 1,882 3,895 4,486 5,153 5,758 5,282 6,049 6,869 7,640 22,045 24,406 27,016 30,007 (4,717) 2,361 2,610 2,991 2010 21,548 2,088 7,360 10,774 41,770 2,114 6,353 8,467 33,303 3,296 Income Statement ($ 000) Sales Cost of Goods Sold Raw Materials Direct Labor Costs Gross Profit Sales and Marketing Administrative EBITDA Depreciation EBIT Interest Expense (net) Pretax Income Income Tax Net Income 2005 2006 2007 2008 77,069 85,993 95,777 106,497 2009 118,236 131,083 2010 (15,692) (17,337) (19,120) (21,052) (23,142) (18,250) (20,772) (23,602) (26,772) (30,319) 43,127 47,884 53,055 58,673 64,775 (11,661) (14,258) (17,269) (20,746) (23,564) (13,934) (12,968) (14,443) (14,995) (15,465) 17,532 20,658 21,343 22,932 25,746 (5,400) (5,355) (5,315) (5,278) (5,245) 12,132 15,303 16,028 17,654 20,501 (80) (6,902) (6,902) (6,902) (6,902) 12,052 8,401 9,126 10,752 13,599 (4,218) (2,940) (3,194) (3,763) (4,760) 7,834 5,461 5,932 6,989 8,839 (25,405) (34,290) 71,388 (26,125) (17,146) 28,117 (6,736) 21,381 (6,902) 14,479 (5,068) 9,411 (Click on the following icon in order to copy its contents into a spreadsheet.) Estimated 2005 Balance Sheet Data for Ideko Corporation Balance Sheet ($ 000) Assets Cash and Equivalents Accounts Receivable Inventories Total Current Assets Property, Plant, and Equipment Goodwill Total Assets Liabilities and Stockholders' Equity Accounts Payable Debt Total Liabilities Stockholders' Equity Total Liabilities and Equity 6,164 19,003 6,165 31,332 48,600 72,332 152,264 4,654 101,500 106,154 46,110 152,264 (Click on the following icon in order to copy its contents into a spreadsheet.) Fixed Assets and Capital Investment ($ 000) 2007 2008 4,950 4,950 (5,315) (5,278) New Investment Depreciation 2005 4,950 (5,400) 2006 4,950 (5,355) 2009 4,950 (5,245) 2010 20,150 (6,736) Forecast Ideko's free cash flow (reproduce Table 19.10 assuming Ideko's market share will increase by 0.45 percent per year; investment, financing, and depreciation will be adjusted accordingly; and the projected improvements in working capital occur (that is, ldeko's working capital requirements through 2010 will be as shown here). Ideko's pro-forma income statements for 2005-2010 are shown here, while its balance sheet for 2005 is shown here. Ideko's production plant will require an expansion in 2010 (when production volume will exceed the current level by 50%), and the cost of this expansion will be $15.2 million. This amount will be borrowed from a financial institution at an interest rate of 6.8%. The new projected capital investments are shown here. (Assume an income tax rate of 35%.) Calculate Ideko's free cash flow through 2010 below: (Round to the nearest $ 000.) Free Cash Flow ($ 000) Net Income Plus: After-tax Interest Expense Unlevered Net Income Plus: Depreciation Less: Increase in NWC Less: Capital Expenditures Free Cash Flow of Firm Plus: Net Borrowing Less: After-tax Interest Expense Free Cash Flow to Equity 2006 TABLE 19.10 SPREADSHEET Ideko's Free Cash Flow Forecast Year 2005 Free Cash Flow ($ 000) 1 Net Income 2 Plus: After-Tax Interest Expense 3 Unlevered Net Income 4 Plus: Depreciation 5 Less: Increases in NWC 6 Less: Capital Expenditures 7 Free Cash Flow of Fir 8 Plus: Net Borrowing 9 Less: After-Tax Interest Expense 10 Free Cash Flow to Equity 2006 2007 2008 (4,420) (4,420) 9,055 2009 5,193 6,247 8,382 10,545 5,304 6,960 4,420 4,420 4,420 5,083 9,613 10,667 11,380 5,405 (3,663) (4,089) (4,685) (5,231) 13,465 15,849 6,865 7,678 7,710 5,450 3,412 (5,000) (5,000) (20,000) (15,000) (8,000) 13,475 7,409 (5,845) 1,458 10,328 15,000 5,000 (5,083) (5,304) 1,375 5,024 (4,420) 2,989 4,735 2010 (Click on the following icon in order to copy its contents into a spreadsheet.) Ideko's Working Capital Requirements Working Capital Days Assets Accounts Receivable Raw Materials Finished Goods Minimum Cash Balance Liabilities Based on: Sales Revenue Raw Materials Costs Raw Materials + Labor Costs Sales Revenue Wages Payable Direct Labor + Admin Costs Other Accounts Payable Raw Materials + Sales and Marketing 2005 Days 90 45 45 30 15 45 > 2005 Days 60 30 45 30 15 45 Working Capital ($ 000) Assets Accounts Receivable Raw Materials Finished Goods Minimum Cash Balance Total Current Assets Labilities Wages Payable Other Accounts Payable Total Current Liabilities Net Working Capital Increase in Net Working Capital 2005 2006 19,003 14,136 1,935 1,425 4,185 4,698 6,334 7,068 31,457 27,327 1,323 3,372 4,695 26,762 2007 2008 2009 15,744 17,506 19,436 1,572 1,730 1,902 5,267 5,896 6,591 7,872 8,753 9,718 30,455 33,885 37,647 1,387 1,563 1,716 1,882 3,895 4,486 5,153 5,758 5,282 6,049 6,869 7,640 22,045 24,406 27,016 30,007 (4,717) 2,361 2,610 2,991 2010 21,548 2,088 7,360 10,774 41,770 2,114 6,353 8,467 33,303 3,296 Income Statement ($ 000) Sales Cost of Goods Sold Raw Materials Direct Labor Costs Gross Profit Sales and Marketing Administrative EBITDA Depreciation EBIT Interest Expense (net) Pretax Income Income Tax Net Income 2005 2006 2007 2008 77,069 85,993 95,777 106,497 2009 118,236 131,083 2010 (15,692) (17,337) (19,120) (21,052) (23,142) (18,250) (20,772) (23,602) (26,772) (30,319) 43,127 47,884 53,055 58,673 64,775 (11,661) (14,258) (17,269) (20,746) (23,564) (13,934) (12,968) (14,443) (14,995) (15,465) 17,532 20,658 21,343 22,932 25,746 (5,400) (5,355) (5,315) (5,278) (5,245) 12,132 15,303 16,028 17,654 20,501 (80) (6,902) (6,902) (6,902) (6,902) 12,052 8,401 9,126 10,752 13,599 (4,218) (2,940) (3,194) (3,763) (4,760) 7,834 5,461 5,932 6,989 8,839 (25,405) (34,290) 71,388 (26,125) (17,146) 28,117 (6,736) 21,381 (6,902) 14,479 (5,068) 9,411 (Click on the following icon in order to copy its contents into a spreadsheet.) Estimated 2005 Balance Sheet Data for Ideko Corporation Balance Sheet ($ 000) Assets Cash and Equivalents Accounts Receivable Inventories Total Current Assets Property, Plant, and Equipment Goodwill Total Assets Liabilities and Stockholders' Equity Accounts Payable Debt Total Liabilities Stockholders' Equity Total Liabilities and Equity 6,164 19,003 6,165 31,332 48,600 72,332 152,264 4,654 101,500 106,154 46,110 152,264 (Click on the following icon in order to copy its contents into a spreadsheet.) Fixed Assets and Capital Investment ($ 000) 2007 2008 4,950 4,950 (5,315) (5,278) New Investment Depreciation 2005 4,950 (5,400) 2006 4,950 (5,355) 2009 4,950 (5,245) 2010 20,150 (6,736)

Answer rating: 100% (QA)

To calculate Idekos free cash flow through 2010 we need to consider various factors such as net income aftertax interest expense depreciation changes ... View the full answer