Question

The Henley Corporation is a privately held company specializing in lawn care products and services. It was a WACC of 12.5%. Further, the most recent financial statements are shown below.

Income Statement for the year ending December 31 (Millions of Dollars Except for Per Share Data)

	2007
Net sales	$800.00
Operating Costs (except depreciation)	576
Depreciation	60
Earnings before interest and taxes (EBIT)	$164.00
Less interest	32
Earnings before taxes	$132.00
Taxes (40%)	52.8
Net income available for common stockholders	$79.20
Number of shares (in millions)	10

Balance Sheet for December 31 (Millions of Dollars)

	2007		2007
Assets		Liabilities and Equity
Cash	$8.00	Accounts payable	$16.00
Marketable securities	20	Notes payable	40
Accounts receivable	80	Accruals	40
Inventories	160	Total current liabilities	$96.00
Total current assets	268	Long-term bonds	315
Net Property, Plant and equipment	600

The ratios and selected information for the current and projected years are shown below (sales growth beyond 2011 = 6% per year; all the ratios beyond 2011 are the same as in 2011).

Actual		Projected
	2007	2008	2009	2010
Sales growth rate		15%	6%	6%
Operating Costs/Sales	72%	72	72	72
Depreciation/Net PPE	10	10	10	10
Cash/Sales	1	1	1	1
Accounts Receivable/Sales	10	10	10	10
Inventories/Sales	20	20	20	20
Net PPE/Sales	75	75	75	75
Accounts payable/Sales	2	2	2	2
Accruals/Sales	5	5	5	5
Tax rate	40	40	40	40

(a)

Calculate free cash flow (in millions of dollars) for each projected year till 2010. (Round your answer to two decimal places.)

2008$  million

2009$  million

2010$  million

What are the FCFs after 2010?

FCFs will grow at the same rate as sales, at  %.

(b)

Calculate the enterprise value (in millions of dollars) at the end of fiscal year 2007 (i.e., 12/31/2007). (Round your answer to two decimal places.)

$

(c)

Calculate the stock price (in dollars) at the end of fiscal year 2007 (i.e., 12/31/2007). (Round your answer to two decimal places.)

$

Answer 1

a.  Forecast the parts of the income statement and balance sheets necessary to calculate free cash flow.
Partial Income Statement for the Year Ending December 31 (Millions of Dollars)
	Actual	Projected	Projected	Projected	Projected
	2007	2008	2009	2010	2011
Net Sales	$   800.0	$   920.0	$1,012.0	$1,072.7	$1,137.1
Costs (except depreciation)	$   576.0	$   662.4	$   728.6	$   772.4	$   818.7
Depreciation	$     60.0	$     69.0	$     75.9	$     80.5	$     85.3
Total operating costs	$   636.0	$   731.4	$   804.5	$   852.8	$   904.0
Earning before int. & tax	$   164.0	$   188.6	$   207.5	$   219.9	$   233.1
Partial Balance Sheets for December 31 (Millions of Dollars)
	Actual	Projected	Projected	Projected	Projected
Operating Assets	2007	2008	2009	2010	2011
Cash	$       8.0	$       9.2	$     10.1	$     10.7	$     11.4
Accounts receivable	$     80.0	$     92.0	$   101.2	$   107.3	$   113.7
Inventories	$   160.0	$   184.0	$   202.4	$   214.5	$   227.4
Net plant and equipment	$   600.0	$   690.0	$   759.0	$   804.5	$   852.8
Operating Liabilities
Accounts Payable	$     16.0	$     18.4	$     20.2	$     21.5	$     22.7
Accruals	$     40.0	$     46.0	$     50.6	$     53.6	$     56.9
b.   Calculate free cash flow for each projected year.  Also calculate the growth rates of free cash flow each year to ensure that there is constant growth (i.e., the same as the constant growth rate in sales) by the end of the forecast period.
							Actual	Projected	Projected	Projected	Projected
						Calculation of FCF	2007	2008	2009	2010	2011
Operating current assets	248.0	285.2	313.7	332.5	352.5
Operating current liabilities	56.0	64.4	70.8	75.1	79.6
Net operating working capital	192.0	220.8	242.9	257.5	272.9
Net PPE	600.0	690.0	759.0	804.5	852.8
Net operating capital	792.0	910.8	1,001.9	1,062.0	1,125.7
NOPAT	98.4	113.2	124.5	131.9	139.9
Investment in operating capital	na	118.8	91.1	60.1	63.7
Free cash flow	na	(5.6)	33.4	71.8	76.1
Growth in FCF	na	na	-692.1%	115.1%	6.0%
Growth in sales		15%	10%	6%	6%

Enterprise Value

	Actual	Projected	Projected	Projected	Projected
	2007	2008	2009	2010	2011
Free cash flow		(5.6)	33.4	71.8	76.1
Long-term constant growth in FCF					6.0%
Weighted average cost of capital (WACC)	10.5%	10.5%	10.5%	10.5%	10.5%
Horizon value					1,793.6
FCF in Years 1-3 and FCF4 + horizon value in Year 4		(5.6)	33.4	71.8	1,869.7
Value of operations (PV of FCF + HV)	1,329.6
Operating capital	792.0
Market value added (MVA=Market value of company - book value of company = Value of operations - Operating capital)	537.6
e.  Calculate the price per share of common equity as of 12/31/2012.
	Actual
	2007
Value of Operations	1,329.6
Plus Value of Mkt. Sec.	20.0
Total Value of Company	1,349.6
Less Value of Debt	355.0
Value of Common Equity	994.6
Divided by number of shares	10
Price per share	99.5