You have set up Unlevered Free Cash Flow (UFCF) projections for a DCF analysis of a steel manufacturing company based in the U.S., as shown below:

 

This company has Operating Leases but no Finance Leases. Which of the following answer choices represent(s) a potential PROBLEM(s) with these projections?

A The projection period may be too short, as UFCF is still growing quickly by Year 8 (far above the perpetuity growth rate typically assumed in the Terminal Period).

B CapEx equals D&A in each projected year, even though the company's revenue is growing at 8-10% annually in most of the projected period.

C EBIT and NOPAT are not properly adjusted for the Operating Lease Expense.

D. Deferred Income Taxes contribute far too much to UFCF in the projected period.

E The Change in Working Capital as a % of the Change in Revenue is too consistent in the projected period; it has fluctuated significantly in the historical years, so it should do that going forward as well.

F All of the above.

G Answer choices A and B.

H Answer choices A, B, and C.

I Answer choices A, B, and D.

J Answer choices A, B, D, and E.

Transcribed Image Text:

Steel Dynamics Inc. - FCF Projections: Revenue: Revenue Growth Rate: Operating Income (EBIT): Operating Margin: Growth Rate: (-) Taxes, Excluding Effect of Interest: Net Operating Profit After Taxes (NOPAT): Adjustments for Non-Cash Charges: (+) Depreciation & Amortization: % Revenue: (+/-) Deferred Income Taxes: % Income Statement Taxes: Net Change in Working Capital: % Change in Revenue: % Revenue: (-) Capital Expenditures: % Revenue: Unlevered Free Cash Flow: Growth Rate: Units: $M % $M % % $M $M $M % $M % $M % % $M % $M % Year 1 386.8 5.2% (1.1%) (96.7) 290.1 230.9 3.1% 30.7 30.9% $ 7,372.9 $ 8,756.0 $ 7,594.4 $ 7,716.0 $ 8,406.2 $ 9,259.3 $ 10,127.2 $ 11,006.6 1.1% 18.8% (13.3%) 1.6% 8.9% 10.1% 9.4% 8.7% (129.9) (157.1%) (1.8%) (186.8) (2.5%) Historical Year 2 $ 235.0 $ N/A 580.3 6.6% 50.0% (145.1) 435.2 263.3 3.0% (25.0) (34.2%) 8.1 0.6% 0.1% (111.8) (1.3%) Year 3 569.8 $ 142.4% 355.7 4.7% (38.7%) (88.9) 266.8 294.6 3.9% (99.3) 102.5% Year 4 527.5 (45.4%) 6.9% 379.4 4.9% 6.7% (94.9) 284.6 246.9 3.2% 23.7 25.0% (6.1) (5.0%) (0.1%) (114.5) (246.9) (1.5%) (3.2%) Year 5 875.1 $ 302.2 $ 53.6% (65.5%) 461.2 5.5% 21.6% (115.3) 345.9 269.0 3.2% 23.1 20.0% (34.5) (5.0%) (0.4%) Projected Year 6 (269.0) (3.2%) 334.5 $ 10.7% 566.3 6.1% 22.8% (141.6) 424.7 268.5 2.9% 21.2 15.0% (42.7) (5.0%) (0.5%) (268.5) (2.9%) Year 7 403.3 $ 20.6% 660.0 6.5% 16.5% (165.0) 495.0 293.7 2.9% 16.5 10.0% (43.4) (5.0%) (0.4%) (293.7) (2.9%) Year 8 468.1 $ 16.1% 789.2 7.2% 19.6% (197.3) 591.9 308.2 2.8% 19.7 10.0% (44.0) (5.0%) (0.4%) (308.2) (2.8%) 567.7 21.3% Steel Dynamics Inc. - FCF Projections: Revenue: Revenue Growth Rate: Operating Income (EBIT): Operating Margin: Growth Rate: (-) Taxes, Excluding Effect of Interest: Net Operating Profit After Taxes (NOPAT): Adjustments for Non-Cash Charges: (+) Depreciation & Amortization: % Revenue: (+/-) Deferred Income Taxes: % Income Statement Taxes: Net Change in Working Capital: % Change in Revenue: % Revenue: (-) Capital Expenditures: % Revenue: Unlevered Free Cash Flow: Growth Rate: Units: $M % $M % % $M $M $M % $M % $M % % $M % $M % Year 1 386.8 5.2% (1.1%) (96.7) 290.1 230.9 3.1% 30.7 30.9% $ 7,372.9 $ 8,756.0 $ 7,594.4 $ 7,716.0 $ 8,406.2 $ 9,259.3 $ 10,127.2 $ 11,006.6 1.1% 18.8% (13.3%) 1.6% 8.9% 10.1% 9.4% 8.7% (129.9) (157.1%) (1.8%) (186.8) (2.5%) Historical Year 2 $ 235.0 $ N/A 580.3 6.6% 50.0% (145.1) 435.2 263.3 3.0% (25.0) (34.2%) 8.1 0.6% 0.1% (111.8) (1.3%) Year 3 569.8 $ 142.4% 355.7 4.7% (38.7%) (88.9) 266.8 294.6 3.9% (99.3) 102.5% Year 4 527.5 (45.4%) 6.9% 379.4 4.9% 6.7% (94.9) 284.6 246.9 3.2% 23.7 25.0% (6.1) (5.0%) (0.1%) (114.5) (246.9) (1.5%) (3.2%) Year 5 875.1 $ 302.2 $ 53.6% (65.5%) 461.2 5.5% 21.6% (115.3) 345.9 269.0 3.2% 23.1 20.0% (34.5) (5.0%) (0.4%) Projected Year 6 (269.0) (3.2%) 334.5 $ 10.7% 566.3 6.1% 22.8% (141.6) 424.7 268.5 2.9% 21.2 15.0% (42.7) (5.0%) (0.5%) (268.5) (2.9%) Year 7 403.3 $ 20.6% 660.0 6.5% 16.5% (165.0) 495.0 293.7 2.9% 16.5 10.0% (43.4) (5.0%) (0.4%) (293.7) (2.9%) Year 8 468.1 $ 16.1% 789.2 7.2% 19.6% (197.3) 591.9 308.2 2.8% 19.7 10.0% (44.0) (5.0%) (0.4%) (308.2) (2.8%) 567.7 21.3%

Answer rating: 100% (QA)

Based on the information provided in the image detailing Unlevered Free Cash Flow UFCF projections lets evaluate each potential problem mentioned in t... View the full answer