Question

The financial statements of Lee Steel Fabricators are shown below, with the actual results for 2017 and the projections for 2018. Free cash flow is expected to grow at a 6% rate after 2018. The weighted average cost of capital is 11%.   Assume a tax rate of 25% for 2018.

Find operating capital as of 12/31/2017 and 2018. What is the free cash

flow for 12/31/2018?

What is the horizon value as of 12/31 /2018?

What is the value of operations as of 12/31/2017?

What is the total value of the company as of 12/31/2017?

What is the price per share for 12/31/2017?

Income Statements for the Year Ending December 31

(Millions of Dollars Except for Per Share Data)

	Actual		Projected
	2017		2018
Net sales	$500.0		$530.0
Costs (except depreciation)	360.0		381.6
Depreciation	37.5		39.8
Total operating costs	$397.5		$421.4
Earnings before interest and taxes	$102.5		$108.6
Less interest	13.9		16.0
Earnings before taxes	$ 88.6		$ 92.6
Taxes	35.4		37.0
Net income before preferred
dividends	$ 53.2		$ 55.6
Preferred dividends		6.0		7.4
Net income available for
common dividends	$ 47.2		$ 48.2
Common dividends	$ 40.8		$ 29.7
Addition to retained earnings		$ 6.4	$ 18.5
Number of shares		10		10
Dividends per share		$ 4.08		$ 2.97

Balance Sheets for December 31 (Millions of Dollars)

	Actual 2017		Projected 2018
Assets
Cash		$ 5.3		$   5.6
Marketable securities		49.9		51.9
Accounts receivable		53.0		56.2
Inventories		106.0		112.4
Total current assets	$214.2		$226.1
Net plant and equipment		375.0		397.5
Total assets	$589.2		$623.6
Liabilities and Equity
Accounts payable		$   9.6	$ 11.2
Notes payable		69.9		74.1
Accruals		27.5		28.1
Total current liabilities	$107.0		$113.4
Long-term bonds		140.8		148.2
Preferred stock		35.0		37.1
Common stock (par plus PIC)		160.0		160.0
Retained earnings		146.4		164.9
Common equity	$306.4		$324.9
Total liabilities and equity	$589.2		$623.6

Answer 1

Net income for common stock holder                                    48.2    

Add depreciation                                                                    39.8

Add Increase in Current liabilities                                          6.10

Less Increase in Current Assets                                              11.90

Less Purchase of Fixed Assets                                               62.30

Free Cash flow                                                                       19.90

horizon value = 19.9*1.06/.11-.06 = 421.88

value of operations as of 12/31/2017 = 19.9/.05 = 398

total value of the company as of 12/31/2017 = 421.88/1.11 = 380.07

intrinsic price per share for 12/31/2017 = 380.07/10= $38