Question

An analyst is trying to value Jason’s Specialties (JS) stock. The analyst has collected data from the company and other sources to prepare the below financials, both actual and projected. Based upon these sources, the analyst expects the company’s free cash flows to grow at 4% on average. The analyst has estimated the company’s cost of capital (WACC) to be 16% and its cost of equity to be 21%. The risk-free rate is 2.3%..

1. Which items listed under Current Assets and Current Liabilities are typically excluded from NOWC? What is JS’s NOWC in years 2019 and 2020?

ncome statement for the fiscal year ending January 1 (Millions of dollars)

2019 (Actual)		2020 (Projected)
Net Sales	$400.0		$430.0
Costs	260.0		283.5
Depreciation	37.5		42.5
Earnings before interest and taxes	102.5		104.0
Interest expense	14.1		16.0
Earnings before taxes	88.4		89.9
Taxes (40%)	35.36		35.2
Net income before preferred dividends	53.04		52.8
Preferred dividends	6.0		6.5
Net income	47.04		46.3
Common dividends	37.632		38.2
Addition to retained earnings	9.0408		8.1

Balance sheets for the fiscal year ending January 1 (Millions of dollars)

2019 (Actual)		2020 (Projected)
Cash	$6.3		$3.6
Marketable Securities	40.9		39.128
Accounts Receivable	62.0		67.0
Inventories	107.0		105.5
Net plant & equipment	391.0		415.36
Total Assets	607.2		630.58
Accounts payable	9.6		12.1
Accruals	25.5		29.1
Long-term bonds	210.7		217.78
Preferred Stock	55		57.1
Common Stock (Par plus PIC)	160.0		160.0
Retained earnings	146.4		154.5
Total Liabilities & Equity	607.2		630.58

Answer 1

NOWC or Net Operating Working Capital is the amount by which Current Operating Assets are in excess of Current Operating Liabilities

NOWC = Current Operating Assets - Current Operating Liabilities

It comprises of Assets and Liabilities which are involved in the company's operating activities

Widely accepted practice says, Current Operating Assets includes Cash & Equivalents, Inventories and Account receivables. It excludes Marketable Securities from the given balance sheet since it is not involved in Operating Activities, hence, considered Non-Operating Current Asset

The Current Operating Liabilities includes Accounts Payable and Accruals. In the given balance these two will be included in the Current Operating Liabilities

JS' NOWC in 2019 = (Cash & Equiv + Account Receivable + Inventories) - (Accounts Payable + Accruals)

JS' NOWC in 2019 = (6.3 + 62 + 107) - (9.6 + 25.5) = 175.3 - 35.1 = 140.2

JS' NOWC in 2020 = (3.6 + 67 + 105.5) - (12.1 + 29.1) = 176.1 - 41.2 = 134.9

Hence, JS' NOWC in 2019 is 140.2 and JS' NOWC in 2020 is 134.9