Assumptions (Note: You must enable iterative calculations option before viewing the answers to this problem) Sales growth
Question:
Assumptions | (Note: You must enable iterative calculations option before viewing the answers to this problem) | ||||||
Sales growth rate (2021/22, 2022/23, 2023/24) | 15% | ||||||
Sales growth rate (2024/25, 2025/26) | 3% | (use this growth rate in calculation of terminal value and in part e) | |||||
Current assets/Sales | 16% | ||||||
Current liabilities/Sales | 8% | ||||||
Net fixed assets/Sales | 40% | ||||||
Costs of goods sold/Sales | 30% | ||||||
Depreciation rate | 12% | ||||||
Interest rate on debt | 7.00% | ||||||
Interest paid on cash and marketable sec. | 1.00% | ||||||
Tax rate | 35% | ||||||
Dividend payout ratio | 15% | ||||||
Year | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | |
Income statement (mil. US$) | |||||||
Sales | $4,000 | ||||||
Costs of goods sold | |||||||
Interest payments on debt | |||||||
Interest earned on cash and marketable sec. | |||||||
Depreciation | ($210) | ||||||
Profit before tax | |||||||
Taxes | |||||||
Profit after tax (net income) | |||||||
Dividends | |||||||
Retained earnings | |||||||
Balance sheet (mil. US$) | |||||||
Cash and marketable securities | $120 | ||||||
Current assets | |||||||
Fixed assets | |||||||
At cost | |||||||
Accumulated Depreciation | ($265) | ||||||
Net fixed assets | |||||||
Total assets | |||||||
Current liabilities | |||||||
Debt | |||||||
Stock | $600 | ||||||
Accumulated retained earnings | $850 | ||||||
Total liabilities and equity | |||||||
Year | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | |
Free cash flow calculation | |||||||
Start with Profit after tax | |||||||
Add back depreciation | |||||||
Subtract increase in current assets | |||||||
Add back increase in current liabilities | |||||||
Subtract increase in fixed assets at cost | |||||||
Add back after-tax interest on debt | |||||||
Subtract after-tax interest on cash and mkt. sec. | |||||||
Free cash flow (mil. US$) | |||||||
Valuing the firm | |||||||
Weighted average cost of capital (WACC) | 26% | ||||||
Year | 2021 | 2022 | 2023 | 2024 | 2025 | 2026 | |
FCF | |||||||
Terminal value | |||||||
Total | |||||||
NPV of row 69 | |||||||
Add in initial (year 2021) cash and mkt. sec. | |||||||
Enterprise value | |||||||
Subtract out value of firm's debt today (yr 2021) | |||||||
Equity value | |||||||
Tax Rate | |||||||
20% | 25% | 35% | |||||
1% | |||||||
growth rate | 2% | ||||||
of sales | 3% | ||||||
for 2025/26 | 4% | ||||||
5% | |||||||
6% | |||||||
7% | |||||||
8% | |||||||
9% | |||||||
(f) All else equal, what is the effect of a decline in tax rate from 35% to 20% on the equity value? For which growth rate the impact of tax rate decrease is most prounounced? Use numbers in the data table to answer this question. Provide your answer below. (6 points) | |||||||
Understanding Financial Statements
ISBN: 978-0133874037
11th edition
Authors: Lyn Fraser, Aileen Ormiston