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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) 2015 Net Sales $ 800.0 Costs (except depreciation) $ 576.0 Depreciation $ 60.0 Total operating costs $ 636.0 Earning before int. & tax $ 164.0 Less interest $ 32.0 Earning before taxes $ 132.0 Taxes (40%) $ 52.8 Net income before pref. div. $ 79.2 Preferred div. $ 1.4 Net income avail. for com. div. $ 77.9 Common dividends $ 31.1 Addition to retained earnings $ 46.7 Number of shares (in millions) Dividends per share 10 $ 3.11 Balance Sheets for December 31 (Millions of Dollars) Assets 2015 Liabilities and Equity 2015 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 Total Assets $ 868.0 (Par plus PIC) $ 257.0 Retained earnings 200.0 Common equity $ 457.0 Total liabilities and equity $ 868.0 Projected ratios and selected information for the current and projected years are shown below. Inputs Sales Growth Rate Costs / Sales Depreciation / Net PPE Cash / Sales Acct. Rec. / Sales Inventories / Sales Net PPE / Sales Acct. Pay. Sales Accruals Sales Tax rate Weighted average cost of capital (WACC) Actual Projected T Projected T2 Projected Projected T3 T4 2015 2016 2017 2018 2019 + 15% 10% 6% 6%! 72% 72% 72% 72% 72% 10% 10% 10% 10% 10% 1% 1% 1% 1% 1%! 10% 10% 10% 10% 10% 20% 20% 20% 20% 20% 75% 75% 75% 75% 75%! 2% 2% 2% 2% 2% 5% 5% 5% 5% 5% 40% 10.5% 40% 40% 40% 40%! 10.5% 10.5% 10.5% 10.5% a. Forecast the parts of the income statement and balance sheets necessary to calculate free cash flow. Partial Income Statement for the Year Ending December 31 (Millions of Dollars) Actual 2015 Projected 2016 Projected T2 Projected T3 Projected T4 + 2017 2018 2019 Net Sales $ 800.0 $ 920.0 $ 1,012.0 $ 1,072.7 $ 1,137.1 Costs (except depreciation) $ 576.0 $ 662.4 $ 728.6 $ 772.4 $ 818.7 Depreciation $ 60.0 $ 69.0 $ 75.9 $ 80.5 $ 85.3 Total operating costs $ 636.0 $ 731.4 $ 804.5 $ 852.8 $ 904.0 Earning before int. & tax $ 164.0 $ 188.6 $ 207.5 $ 219.9 $ 233.1 Partial Balance Sheets for December 31 (Millions of Dollars) Actual Projected Operating Assets 2015 2016 Projected T 2017 Projected T3 2018 Projected T4 2019 Cash $ 8.0 $ 9.2 $ 10.1 $ 10.7 $ 11.4 Accounts receivable $ 80.0 $ 92.0 $ 101.2 $ 107.3 $ 113.7 Inventories $ 160.0 $ 184.0 $ 202.4 $ 214.5 $ 227.4 Net plant and equipment $ 600.0 $ 690.0 $ 759.0 $ 804.5 $ 852.8 Operating Liabilities Accounts Payable Accruals $ 16.0 $ $ 40.0 $ 18.4 46.0 $ $ 20.2 $ 50.6 $ 21.5 $ 22.7 53.6 $ 56.9 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 (i.e., the same as the constant growth rate in sales) by the end of the forecast period. Actual Projected Projected Projected Projected T T2 T3 T4 Calculation of FCF Operating current assets 2015 2016 2017 2018 2019 248.0 285.2 313.7 332.5 352.5 Operating current liabilities 56.0 64.4 70.8 75.1 79.6 Net operating working capital Net PPE 192.0 220.8 242.9 257.5 272.9 600.0 690.0 759.0 804.5 852.8 NOPAT Total (Net) operating capital Investment in operating capital 792.0 910.8 1,001.9 1,062.0 1,125.7 98.4 113.2 124.5 131.9 139.9 na 118.8 91.1 60.1 63.7 Free cash flow Growth in FCF na (5.6) 33.4 71.8 76.1 na na na 115.1% 6.0% Growth in sales 15.0% 10.0% 6.0% 6.0% c. Calculate operating profitability (OP=NOPAT/Sales), capital requirements (CR=Operating capital/Sales), and return on invested capital (ROIC=NOPAT/Operating capital at beginning of year). Based on the spread between ROIC 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)? Actual Projected 1 Projected T2 Projected Projected T3 T 2015 2016 2017 2018 2019 Operating profitability (OP=NOPAT/Sales) Capital requirement (CR=Operating capital/Sales) 12.3% 12.3% 12.3% 12.3% 12.3% 99.0% 99.0% 99.0% 99.0% 99.0% Expected Return on invested capital E(ROICN)=NOPAT N+1/Total Operating Capital N na 13.7% 13.2% 13.2% 13.2% Weighted average cost of capital (WACC) na 10.5% 10.5% 10.5% 10.5% Spread between E(ROIC) and WACC na 3.2% 2.7% 2.7% 2.7% 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 jhorizon is 6 percent.) 1 Actual Projected Projected T2 Projected T3 Projected T4 2015 2016 2017 2018 2019 Free cash flow (5.6) 33.4 71.8 76.1 Long-term constant growth in FCF 6.0% Weighted average cost of capital (WACC) 10.5% 10.5% 10.5% 10.5% 10.5% Horizon value 1,793.6 FCF in Years 1-3 and FCF4 + horizon value in Year 4 Value of operations (PV of FCF + HV) (5.6) 33.4 71.8 1,869.7 1,329.6 L Operating capital 792.0 Market value added (MVA-Market value of company - book value of company = Value of operations - Operating capital) 537.6 le. Calculate the price per share of common equity as of 12/31/2015. Actual 2015 Value of Operations 1,329.6 Plus Value of Mkt. Sec. 20.0 Total Value of Company (Enterprise Value) 1,349.6 Less Value of Debt 340.0 Less Value of Pref. 15.0 Value of Common Equity 994.6 Divided by number of shares Price per share 10 99.46 If. Henley's valuation is sensitive to the assumptions we use. Fill in the following sensitivity analysis for Henley (Hint: Try using data tables) COGS% Share Price 72% 99.46 66% 175.72 68% 150.30 70% 124.88 72% 99.46 74% 74.03 76% 48.61 78% 23.19 Net PPE Share Price 75% 99.46 69% 119.16 71% 112.59 73% 106.02 75% 99.46 77% 92.89 79% 86.32 81% 79.75 g. You are the CFO of Hampton Corporation, a large producer of Lawn products. Recently your CEO has been in communication with the CEO of Henley Corporation a smaller producer of Lawn product about a possible merger. Your CEO (Scott Hampton) has asked you to analyze the merger opportunity and make a recommendation. According to Mr. Hampton, the CEO of Henley is asking $110 a share for the equity in his firm. Do you recommend the Merger? Why or why not? 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) 2015 Net Sales $ 800.0 Costs (except depreciation) $ 576.0 Depreciation $ 60.0 Total operating costs $ 636.0 Earning before int. & tax $ 164.0 Less interest $ 32.0 Earning before taxes $ 132.0 Taxes (40%) $ 52.8 Net income before pref. div. $ 79.2 Preferred div. $ 1.4 Net income avail. for com. div. $ 77.9 Common dividends $ 31.1 Addition to retained earnings $ 46.7 Number of shares (in millions) Dividends per share 10 $ 3.11 Balance Sheets for December 31 (Millions of Dollars) Assets 2015 Liabilities and Equity 2015 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 Total Assets $ 868.0 (Par plus PIC) $ 257.0 Retained earnings 200.0 Common equity $ 457.0 Total liabilities and equity $ 868.0 Projected ratios and selected information for the current and projected years are shown below. Inputs Sales Growth Rate Costs / Sales Depreciation / Net PPE Cash / Sales Acct. Rec. / Sales Inventories / Sales Net PPE / Sales Acct. Pay. Sales Accruals Sales Tax rate Weighted average cost of capital (WACC) Actual Projected T Projected T2 Projected Projected T3 T4 2015 2016 2017 2018 2019 + 15% 10% 6% 6%! 72% 72% 72% 72% 72% 10% 10% 10% 10% 10% 1% 1% 1% 1% 1%! 10% 10% 10% 10% 10% 20% 20% 20% 20% 20% 75% 75% 75% 75% 75%! 2% 2% 2% 2% 2% 5% 5% 5% 5% 5% 40% 10.5% 40% 40% 40% 40%! 10.5% 10.5% 10.5% 10.5% a. Forecast the parts of the income statement and balance sheets necessary to calculate free cash flow. Partial Income Statement for the Year Ending December 31 (Millions of Dollars) Actual 2015 Projected 2016 Projected T2 Projected T3 Projected T4 + 2017 2018 2019 Net Sales $ 800.0 $ 920.0 $ 1,012.0 $ 1,072.7 $ 1,137.1 Costs (except depreciation) $ 576.0 $ 662.4 $ 728.6 $ 772.4 $ 818.7 Depreciation $ 60.0 $ 69.0 $ 75.9 $ 80.5 $ 85.3 Total operating costs $ 636.0 $ 731.4 $ 804.5 $ 852.8 $ 904.0 Earning before int. & tax $ 164.0 $ 188.6 $ 207.5 $ 219.9 $ 233.1 Partial Balance Sheets for December 31 (Millions of Dollars) Actual Projected Operating Assets 2015 2016 Projected T 2017 Projected T3 2018 Projected T4 2019 Cash $ 8.0 $ 9.2 $ 10.1 $ 10.7 $ 11.4 Accounts receivable $ 80.0 $ 92.0 $ 101.2 $ 107.3 $ 113.7 Inventories $ 160.0 $ 184.0 $ 202.4 $ 214.5 $ 227.4 Net plant and equipment $ 600.0 $ 690.0 $ 759.0 $ 804.5 $ 852.8 Operating Liabilities Accounts Payable Accruals $ 16.0 $ $ 40.0 $ 18.4 46.0 $ $ 20.2 $ 50.6 $ 21.5 $ 22.7 53.6 $ 56.9 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 (i.e., the same as the constant growth rate in sales) by the end of the forecast period. Actual Projected Projected Projected Projected T T2 T3 T4 Calculation of FCF Operating current assets 2015 2016 2017 2018 2019 248.0 285.2 313.7 332.5 352.5 Operating current liabilities 56.0 64.4 70.8 75.1 79.6 Net operating working capital Net PPE 192.0 220.8 242.9 257.5 272.9 600.0 690.0 759.0 804.5 852.8 NOPAT Total (Net) operating capital Investment in operating capital 792.0 910.8 1,001.9 1,062.0 1,125.7 98.4 113.2 124.5 131.9 139.9 na 118.8 91.1 60.1 63.7 Free cash flow Growth in FCF na (5.6) 33.4 71.8 76.1 na na na 115.1% 6.0% Growth in sales 15.0% 10.0% 6.0% 6.0% c. Calculate operating profitability (OP=NOPAT/Sales), capital requirements (CR=Operating capital/Sales), and return on invested capital (ROIC=NOPAT/Operating capital at beginning of year). Based on the spread between ROIC 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)? Actual Projected 1 Projected T2 Projected Projected T3 T 2015 2016 2017 2018 2019 Operating profitability (OP=NOPAT/Sales) Capital requirement (CR=Operating capital/Sales) 12.3% 12.3% 12.3% 12.3% 12.3% 99.0% 99.0% 99.0% 99.0% 99.0% Expected Return on invested capital E(ROICN)=NOPAT N+1/Total Operating Capital N na 13.7% 13.2% 13.2% 13.2% Weighted average cost of capital (WACC) na 10.5% 10.5% 10.5% 10.5% Spread between E(ROIC) and WACC na 3.2% 2.7% 2.7% 2.7% 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 jhorizon is 6 percent.) 1 Actual Projected Projected T2 Projected T3 Projected T4 2015 2016 2017 2018 2019 Free cash flow (5.6) 33.4 71.8 76.1 Long-term constant growth in FCF 6.0% Weighted average cost of capital (WACC) 10.5% 10.5% 10.5% 10.5% 10.5% Horizon value 1,793.6 FCF in Years 1-3 and FCF4 + horizon value in Year 4 Value of operations (PV of FCF + HV) (5.6) 33.4 71.8 1,869.7 1,329.6 L Operating capital 792.0 Market value added (MVA-Market value of company - book value of company = Value of operations - Operating capital) 537.6 le. Calculate the price per share of common equity as of 12/31/2015. Actual 2015 Value of Operations 1,329.6 Plus Value of Mkt. Sec. 20.0 Total Value of Company (Enterprise Value) 1,349.6 Less Value of Debt 340.0 Less Value of Pref. 15.0 Value of Common Equity 994.6 Divided by number of shares Price per share 10 99.46 If. Henley's valuation is sensitive to the assumptions we use. Fill in the following sensitivity analysis for Henley (Hint: Try using data tables) COGS% Share Price 72% 99.46 66% 175.72 68% 150.30 70% 124.88 72% 99.46 74% 74.03 76% 48.61 78% 23.19 Net PPE Share Price 75% 99.46 69% 119.16 71% 112.59 73% 106.02 75% 99.46 77% 92.89 79% 86.32 81% 79.75 g. You are the CFO of Hampton Corporation, a large producer of Lawn products. Recently your CEO has been in communication with the CEO of Henley Corporation a smaller producer of Lawn product about a possible merger. Your CEO (Scott Hampton) has asked you to analyze the merger opportunity and make a recommendation. According to Mr. Hampton, the CEO of Henley is asking $110 a share for the equity in his firm. Do you recommend the Merger? Why or why not?
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Related Book For
Financial management theory and practice
ISBN: 978-1439078099
13th edition
Authors: Eugene F. Brigham and Michael C. Ehrhardt
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