Take another look at the valuations of Rio in Tables 19.1 and 19.2. Now use the live spreadsheets in Connect to show how Rio?s value depends on:

a. The forecasted long-term growth rate.

b. The required amounts of investment in fixed assets and working capital.

c. The opportunity cost of capital. (Note: You can also vary the opportunity cost of capital in Table 19.1.)

d. Profitability?that is, cost of goods sold as a percentage of sales.

e. The assumed amount of debt financing.

Table 19.1

Table 19.2

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Latest Year Forecast 2 4 Б 95.8 118.7 Sales 83.6 89.5 102.5 106.6 110.8 115.2 2 Cost of goods sold 63.1 66.2 71.3 76.3 79.9 83.1 87.0 90.8 3 EBITDA (1- 2) 24.4 20.5 23.3 26.1 26.6 27.7 28.2 27.9 4 10.6 Depreclation 3.3 9.9 11.3 11.8 12.3 12.7 13.1 Profit before tax (EBIT) (3-4) 13.8 17.2 13.4 14.8 14.9 15.4 15.5 14.8 3.2 Тах 3.6 2.8 2.9 3.1 3.1 3.3 3.1 Profit after tax (5– 6) 10.9 13.6 10.6 11.7 11.7 12.2 12.2 11.7 Investment in fl ed assets (change in gross fixed assets) 16.6 11.0 14.6 15.5 15.0 15.6 16.2 15.9 Investment in working capital 1.0 0.5 0.8 0.9 0.5 0.6 0.6 0.4 10 Free cash flow (7+ 4-8-9) 4.9 Б.3 Б.2 Б.5 8.0 8.3 8.2 8.5 PV free cash flow, years 1-6 29.0 77.4 (Horizon value in year 6) PV hortzon value 132.7 PV of company 106.4 Assumptions: Sales growth, % Costs (percent of sales) Working capital (percent of sales) 6.7 7.0 7.0 7.0 4.0 4.0 4.0 3.0 74.5 75.5 74.0 74.5 75.0 75.0 75.5 76.5 13.3 13.0 13.0 13.0 13.0 13.0 13.0 13.0 79.0 79.0 Net fixed assets (percent of sales) 79.2 79.0 79.0 79.0 79.0 79.0 Depreclation (percent of net fixed assets) 14.0 14.0 14.0 Б.О 14.0 14.0 14.0 14.0 Тах rate, % 21.0 WACC, % 9.4 Long-term growth forecast, % 3.0 Axed assets and working capital 109.6 125.1 141.8 204.5 Gross fixed assets 95.0 156.8 172.4 188.6 Less accumulated depreciation 29.0 38.9 49.5 60.8 72.6 84.9 97.6 110.7 75.6 84.2 93.8 Net fixed assets 66.0 70.7 80.9 87.5 91.0 Net working capital 11.1 11.6 12.4 13.3 13.9 14.4 15.0 15.4 Latest Year Forecast 2 4 Free cash flow 4.9 Б.3 5.2 Б.5 8.0 8.3 8.2 8.5 PV free cash flow, years 1-6 28.5 PV hortzon value 75.3 (Horizon value in year 6) 1327 Base-case PV of company 103.8 Debt 62.0 60.0 60.0 58.0 56.0 54.0 53.0 Interest 3.72 3.60 3.60 3.48 3.36 3.24 Interest tax shield 078 076 076 073 071 0.68 PV Interest tax shields 3.6 APV 107.5 Tax rate, % 21.0 Opportunity cost of capital, % 9.9 WACC, % (to discount horizon value to year 6) 9.4 Long-term growth forecast, % 3.0 Interest rate, % (years 1-6) 6.0 After-tax debt service 4.94 2.84 4.84 475 4.65 3.56