Question

Winter Technologies 2018 financial statements are shown below. 2019 Sales are forecast to grow by 7%, and dividends are forecast to increase to $1.50 per share in 2019. Create the 2019 financial statements using the percent of sales method (not the AFN equation) assuming the firm is operating at full capacity in 2018. Any extra borrowing will be done with Notes Payable and excess funds will be used to pay down Notes Payable. Interest on all interest-bearing debt is 5% and is paid on the debt outstanding at the end of the prior year.
What is the AFN in 2019?

2018          
Cash           $100,000   Accounts Payable   $ 300,000
Marketable Securities       250,000   Accruals       250,000
Account Receivable       400,000   Notes Payable       500,000
Inventory           800,000          
Total Current Assets   $1,550,000   Total Current Liabilities   $ 1,050,000
Net Property Plant & Equipment   2,500,000   Long-term Debt   750,000
Common Stock   1,500,000
Retained Earnings    750,000
Total Assets       $4,050,000   Total Liabilities and Equity   $ 4,050,000
Income Statement                  
31-Dec-18                      
Sales       $ 5,000,000              
Operating Costs   4,000,000              
EBIT       1,000,000              
Interest       62,500              
EBT       937,500              
Taxes (30%)   281,250              
Net Income   $ 656,250              
Number of shares outstanding   100,000          
Dividends per share     $1.20  

Using the financial statement you created above, assume sales will grow at 5% after 2019 and that the WACC is 10%. Calculate the free cash flows and the implied stock price today?

Answer 1

1)	Year	2018	Basis for projections	2019	2019 After partly paying off Notes payable
	Sales	5000000	+7.00%	5350000		0.8
	Operating costs	4000000	80.00% of sales	4280000
	EBIT	1000000		1070000
	Interest	62500	5.00% of (750000+500000)	62500
	EBIT	937500		1007500
	Taxes (30%)	281250		302250
	Net Income	656250		705250
	Dividend ($1.20 per share)	120000	$1.50 per share (100000*1.50)	150000
	Addition to retained earnings	536250		555250
	BALANCE SHEET:
	Cash	1,00,000	2.00% of sales	107000.00	107000.00
	Marketable securitites	2,50,000	5.00% of sales	267500.00	267500.00
	Acounts Receivable	4,00,000	8.00% of sales	428000.00	428000.00
	Inventory	8,00,000	16.00% of sales	856000.00	856000.00
	Total current assets	15,50,000		1658500.00	1658500.00
	Net PP&E	25,00,000	50.00% of sales	2675000.00	2675000.00
	Total assets	40,50,000		4333500.00	4333500.00
	Accounts payable	3,00,000	6.00% of sales	321000.00	321000.00
	Accruals	2,50,000	5.00% of sales	267500.00	267500.00
	Notes payable	5,00,000		500000.00	189750.00
	Total current liabilities	10,50,000		1088500.00	778250.00
	Long term debt	7,50,000		750000.00	750000.00
	Common stock	15,00,000		1500000.00	1500000.00
	Retained earnings	7,50,000	+555250	1305250.00	1305250.00
	Total liabilities and Equity	40,50,000		4643750.00	4333500.00
			EFN Needed	-310250.00
	NOTE: There is no need for external financing. There is a surplus of $310,250, which, will be used to pay off notes payable
	{Please check the NI %; is it 15%?
2)	FCF for 2019 = EBIT*(1-t)-Net capital spending-Change in NWC = 1070000*0.7-175000-(1550000-550000-1658500+588500) =				644000
	Value of the firm = 644000*1.05/(0.10-0.05) =		13524000
	Less: Debt (189750+7500000) =		939750
	Value of common equity		12584250
	Number of common shares		100000
	Value per share		$                                     125.84