A client explains that her firm's value must be affected by the choice of explicit forecast horizon To build a model to test her claim, you are provided the information of her company as below Note all units in millions Income Statements Actual Projected Projected Projected Projected 2021 2022 2023 2024 2025 Sales 4,512 44 Sales growth rate 8 0 6 0 6 0 6 0 Costs of Goods Sold 2,797 71 COGS Sales 62 0 62 0 62 0 62 0 Sales, General and Administrative 902 49 SGA Sales 20 0 20 0 20 0 20 0 Depreciation 225 62 Depreciation Net PPE 10 0 10 0 10 0 10 0 Operating Profit 586 62 Interest Income 0 00 Interest Rate on Short term Investment 3 0 3 0 3 0 3 0 Interest expense 105 73 Interest Rate on Debt 8 0 8 0 8 0 8 0 Earnings Before Taxes 480 89 Taxes 192 36 Tax Rate (Taxes EBT) 40 0 40 0 40 0 40 0 Net Income 288 53 Dividends 104 89 Dividend growth rate 28 8 41 7 6 0 6 0 Additions to retained earnings 183 64 Balance Sheets Actual 2021 Cash 45 12 Cash Sales 1 0 1 0 1 0 1 0 Inventory 631 74 Inventory Sales 14 0 14 0 14 0 14 0 Accounts receivable 1,128 11 Accts Rec Sales 25 0 25 0 25 0 25 0 Total current assets 1,804 97 Net PPE 2,256 23 Net PPE Sales 50 0 50 0 50 0 50 0 Total assets 4,061 20 Accounts payable 451 24 Accts Pay Sales 10 0 10 0 10 0 10 0 Accrued expenses 225 62 Accruals Sales 5 0 5 0 5 0 5 0 Short term debt 381 71 Total current liabilities 1,058 57 Long term debt 1,000 00 Long term Debt operating assets 22 8 22 0 22 0 22 0 Total liabilities 2,058 57 Common stock (100 million shares) 600 00 Retained earnings 1,402 63 Total common equity 2,002 63 Total liabilities and equity 4,061 20 Required return on bond (yield) Par Value $ 1,000 00 Number of bonds outstanding, in thousands 1,000 Number of payments remaining 52 Periodic coupon (semi annual) 40 Bond price now $ 1,100 00 Aggregate market value of bonds, $millions $ 1,100 00 Required return on stock Beta 1 2 Risk free rate 4 00 Market risk premium 6 Target weight debt 30 Target weight equity 70 Tax rate 40 Common stock (million shares) 100 Question To evaluate your client's claim, design two valuation templates to show your client the valuation process First assume a short horizon of three years Then compare the results of this three year horizon to a four year forecasted horizon You can use either FCF approach or EP approach to design the valuation templates

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Question: A client explains that her firm's value must be affected by the choice of explicit forecast horizon. To build a model to test her claim,

A client explains that her firm's value must be affected by the choice of explicit forecast horizon. To build a model to test her claim, you are provided the information of her company as below:

Note: all units in millions
Income Statements	Actual		Projected	Projected	Projected	Projected
	2021		2022	2023	2024	2025
Sales	4,512.44	Sales growth rate	8.0%	6.0%	6.0%	6.0%
Costs of Goods Sold	2,797.71	COGS / Sales	62.0%	62.0%	62.0%	62.0%
Sales, General and Administrative	902.49	SGA / Sales	20.0%	20.0%	20.0%	20.0%
Depreciation	225.62	Depreciation / Net PPE	10.0%	10.0%	10.0%	10.0%
Operating Profit	586.62
Interest Income	0.00	Interest Rate on Short-term Investment	3.0%	3.0%	3.0%	3.0%
Interest expense	105.73	Interest Rate on Debt	8.0%	8.0%	8.0%	8.0%
Earnings Before Taxes	480.89
Taxes	192.36	Tax Rate (Taxes/EBT)	40.0%	40.0%	40.0%	40.0%
Net Income	288.53

Dividends	104.89	Dividend growth rate	28.8%	41.7%	6.0%	6.0%
Additions to retained earnings	183.64

Balance Sheets	Actual
	2021
Cash	45.12	Cash / Sales	1.0%	1.0%	1.0%	1.0%
Inventory	631.74	Inventory/ Sales	14.0%	14.0%	14.0%	14.0%
Accounts receivable	1,128.11	Accts. Rec. / Sales	25.0%	25.0%	25.0%	25.0%
Total current assets	1,804.97
Net PPE	2,256.23	Net PPE / Sales	50.0%	50.0%	50.0%	50.0%
Total assets	4,061.20

Accounts payable	451.24	Accts. Pay./ Sales	10.0%	10.0%	10.0%	10.0%
Accrued expenses	225.62	Accruals / Sales	5.0%	5.0%	5.0%	5.0%
Short-term debt	381.71
Total current liabilities	1,058.57
Long-term debt	1,000.00	Long-term Debt / operating assets	22.8%	22.0%	22.0%	22.0%
Total liabilities	2,058.57
Common stock (100 million shares)	600.00
Retained earnings	1,402.63
Total common equity	2,002.63
Total liabilities and equity	4,061.20


Required return on bond (yield)
Par Value	$ 1,000.00
Number of bonds outstanding, in thousands	1,000
Number of payments remaining	52
Periodic coupon (semi-annual)	40
Bond price now	$ 1,100.00
Aggregate market value of bonds, $millions	$ 1,100.00

Required return on stock
Beta	1.2
Risk free rate	4.00%
Market risk premium	6%

Target weight debt	30%
Target weight equity	70%
Tax rate	40%
Common stock (million shares)	100

Question: To evaluate your client's claim, design two valuation templates to show your client the valuation process. First assume a short horizon of three years. Then compare the results of this three-year horizon to a four-year forecasted horizon. You can use either FCF approach or EP approach to design the valuation templates.

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