Its 2006. You work for an investment bank, and need to advise a company that is considering
Question:
It’s 2006. You work for an investment bank, and need to advise a company that is considering acquiring Winnebago. You have been given the Balance Sheet and Income Statement for Winnebago as of August 25, 2006. Winnebago has historically repurchased large amounts of stock with their excess cash flow. These stock repurchases have the same impact as dividends (e.g., in the MM world) so we will assume that Winnebago will pay out all available cash flows above some minimum level required for Net Working Capital in dividends in the future. As we have shown earlier in the semester if Winnebago reinvests these cash flows in projects that earn the return the market requires for Winnebago, the value of the stock will not change, so this assumption is appropriate.
Depreciation expense and investment in fixed assets (Property Plant and Equipment, PP&E) will grow at the same rate as Sales.
Because we assume they pay out all excess cash, Financial Income will be zero in the future.
Tax Rate 35.0%
Use the screenshot to solve questions 1 - 4 below: (Please show your work)
1. Calculate the accounting break-even level of sales for 2008.
2. Assume the company will need to hold Net Working Capital (including cash) equal to 4% of the next year’s sales going forward. You will also need to project 2012 Sales to calculate the NWC in 2011.
3. Winnebago has no long-term debt (see the 2006 report). Calculate the price of Winnebago stock from the cashflows you calculated above. Assume the Market Return is expected to be 13.5% and the Risk Free rate is 2.5%. Assume there are 31,143,000 shares outstanding.
4. Suppose Winnebago decides to become levered. How would you expect this decision to affect the total value of the firm? Please be specific about the assumptions you make when answering this question.
Financial Reporting and Analysis
ISBN: 978-0078025679
6th edition
Authors: Flawrence Revsine, Daniel Collins, Bruce, Mittelstaedt, Leon