Question

Using the information in Exhibit 1 below, calculate North Rock’s Free Cash flow for the year 2019 (in $ millions). Exhibit 1 North Rock Selected Financial Information for the 2019 Period (All amounts are in $ millions except where stated)

Current EBIT (2019) $350.00

Interest Expense $8.45

Interest Paid $8.45

Dividends Paid $2.11

Tax rate (%) 35

Increase (Decrease) in accounts receivable $15.80

Increase (Decrease) in accounts payable $(10.25) I

ncrease (Decrease) in inventory $17.98

Fixed Capital Investment $25.50

Debt 100

Cash 20

Number of shares outstanding 10

2. Suppose that North Rock forecasts that its free cash will be $200 million in 2020, $220 million in 2021 and $250 million in 2022. After 2022 North Rock expects its free cash flow, earnings will grow at an annual rate of 6%. If North Rock’s weighted average cost of capital is 15%, and using information in exhibit 1 what is the value of North Rock’s stock based on this information?

Answer 1

Part 1)

Sl.No	Particulars	Amount in $
i	EBIT (Given)	350,000,000
ii	Interest (Given)	8,450,000
iii	Profit before tax (i-ii)	341,550,000
iv	Taxes @ 35% (iii*35%)	119,542,500
v	Profit after tax (iii-iv)	222,007,500
vi	Add back: Interest	8,450,000
vii	Increase in accounts receivable (Given)	15,800,000
viii	Decrease in accounts payable (Given)	10,250,000
ix	Increase in inventory (Given)	17,980,000
x	Net increase in working capital (vii+viii+ix)	44,030,000
xi	Fixed capital investment (Given)	25,500,000
xii	Available cash	20,000,000
xiii	North Rock's Free cashflow (v+vi-x-xi+xii)	180,927,500

Note:  Debt given is not required to compute free cashflow

Part 2)

Terminal cashflow = cashflow in 2022*(1+growth rate)/(WACC-growth rate) = 250million*(1+0.06)/(0.15-0.06) = 250million*1.06/0.09 = 2,944,444,444

Present value of future cashflow = Cashflow in 2019+{Cashflow in 2020/[(1+WACC)^1]}+{Cashflow in 2021/[(1+WACC)^2]}+{Cashflow in 2022/[(1+WACC)^3]}+{Terminal Cashflow/[(1+WACC)^3]} = 180,927,500+{200,000,000/[(1+0.15)^1]}+{220,000,000/[(1+0.15)^2]}+{250,000,000/[(1+0.15)^3]}+{2,944,444,444/[(1+0.15)^3]} = 180,927,500+{200,000,000/1.15}+{220,000,000/[1.15^2]}+{250,000,000/[1.15^3]}+{2,944,444,444/[1.15^3]} = 180,927,500+173,913,043+(220,000,000/1.3225)+(250,000,000/1.520875)+(2,944,444,444/1.520875) = 180,927,500+173,913,043+166,351,607+164,379,058+1,607,261,902 = 2,292,833,110

Value of firm pertains to shareholders = Present value of future cashflow-Debt = 2,292,833,110-100,000,000 = 2,192,833,110

Value of North Rock’s stock = Value of firm pertains to shareholders/Number of shares outstanding = 2,192,833,110/10,000,000 = $219.28