Question

FORECASTING FINANCIAL STATEMENTS -

Below is a pro-forma income statement and balance sheet for Company A for a 5-year period and a terminal year, based on various assumptions, which already have been completed.

Company A
Income Statement
For the Years Ended
	2017	2018	2019	2020	2021	2022	Terminal year 2023
Sales	550.00	825.00	990.00	1,138.50	1,252.35	1,340.01	1,393.62
		1.50	(825*120%)	(990*115%)	(1138.50*110%)	(1252.35*107%)	(1340.01*104%)
Cost of Sales	275.00	288.75	346.50	398.48	438.32	469.01	487.77
		(825*35%)	(990*35%)	(1138.50*35%)	(1252.35*35%)	(1340.01*35%)	(1393.62*35%)
Gross Profit	275.00	536.25	643.50	740.03	814.03	871.01	905.85
SG&A	55.00	123.75	148.50	170.78	187.85	201.00	209.04
		(825*15%)	(990*15%)	(1138.50*15%)	(1252.35*15%)	(1340.01*15%)	(1393.62*15%)
Depreciation	60.00	72.00	86.40	99.36	109.30	116.95	27.36
		(900*8%)	(1080*8%)	(1242*8%)	(1366.2*8%)	(1461.83*8%)	(711.36-684)
Interest	14.47	24.95	26.07	24.68	20.07	13.21	13.74
		(498.94*5%)	(521.48*5%)	(493.56*5%)	(401.47*5%)	(264.22*5%)	(274.79*5%)
Pretax Income	145.53	315.55	382.53	445.21	496.81	539.85	655.71
Tax	43.66	110.44	133.88	155.82	173.88	188.95	229.50
(35% of Pretax Income)
Net Income	101.87	205.11	248.64	289.39	322.92	350.90	426.21

Company A
Balance sheet
As of
	2017	2018	2019	2020	2021	2022	Terminal year 2023
Cash	60.00	72.19	86.63	99.62	109.58	117.25	183.21
		(288.75/4)	(346.50/4)	(398.48/4)	(438.32/4)	(469.01/4)	balancing figure
Accounts Receivable	5.00	91.67	110.00	126.50	139.15	148.89	154.85
		(825/9)	(990/9)	(1138.5/9)	(1252.35/9)	(1340.01/9)	(1393.62/9)
Inventory	8.00	72.19	86.63	99.62	109.58	117.25	121.94
		(288.75/4)	(346.50/4)	(398.48/4)	(438.32/4)	(469.01/4)	(487.77/4)
Total Current Assets	73.00	236.04	283.25	325.74	358.31	383.39	460.00
PP&E - gross	600.00	900.00	1,080.00	1,242.00	1,366.20	1,461.83	1,520.31
		(600*150%)	(900*120%)	(1080*115%)	(1242*110%)	(1366.20*107%)	(1461.83*104%)
Accumulated Depreciation	200.00	272.00	358.40	457.76	567.06	684.00	711.36
		(200+72)	(272+86.4)	(358.40+99.36)	(457.76+109.30)	(+567.06+116.95)	given
PP&E - net	400.00	628.00	721.60	784.24	799.14	777.83	808.95
Total Assets	473.00	864.04	1,004.85	1,109.98	1,157.46	1,161.22	1,268.95
Accounts Payable	20.00	48.13	57.75	66.41	73.05	78.17	81.29
		(288.75/6)	(346.50/6)	(398.48/6)	(438.32/6)	(469.01/6)	(487.77/6)
Other Current Liabilities	10.00	35.00	45.00	55.00	65.00	75.00	78.00
		given	(35+10)	(45+10)	(55+10)	(65+10)	given
Total Current Liabilities	30.00	83.13	102.75	121.41	138.05	153.17	159.29
Notes Payable	241.13	498.94	521.48	493.56	401.47	264.22	274.79
Total Liabilities	271.13	582.07	624.23	614.97	539.52	417.39	434.08
Common Stock	100.00	100.00	100.00	100.00	100.00	100.00	104.00
Retained Earnings	101.87	181.98	280.61	395.01	517.92	643.83	730.86
Total Equity	201.87	281.98	380.61	495.01	617.92	743.83	834.86
Total Liabilities and Equity	473.00	864.04	1,004.84	1,109.98	1,157.45	1,161.22	1,268.94

(A) Prepare a statement of cash flows for Years 1 through 5 and for the terminal year from the statements prepared above. (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).

(B) Compute free cash flows for Years 1 through 5 and for the terminal year. (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).

(C) Compute an equity value for Company A. Company A has 100 outstanding shares and a cost of equity of 9 percent. (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM).

Answer 1

a)     Statement of Cash Flows
	Year		2018	2019	2020	2021	2022	Terminal year 2023
	Net Income		205.11	248.64	289.39	322.92	350.90	426.21
Add:	Depreciation		72.00	86.40	99.36	109.30	116.95	27.36
Less:	Increase in Accounts Receivables		-86.67	-18.33	-16.50	-12.65	-9.74	-5.96
Less:	Increase in Inventory		-64.19	-14.44	-12.99	-9.96	-7.67	-4.69
Add:	Increase in Accounts Payables		28.13	9.62	8.66	6.64	5.12	3.12
Add:	Increase in Other Current Liabilities		25.00	10.00	10.00	10.00	10.00	3.00
	Net Cash Flows from Operating Activities	A	179.38	321.89	377.92	426.25	465.56	449.04
Less:	Increase in PPE		-228.00	-93.60	-62.64	-14.90	0.00	-31.12
Add:	Decrease in PPE		0.00	0.00	0.00	0.00	21.31	0.00
	Net Cash Flows from Investment Activities	B	-228.00	-93.60	-62.64	-14.90	21.31	-31.12
Add:	Increase in Notes Payables		257.81	22.54	0.00	0.00	0.00	10.57
Less:	Decrease in Notes Payables		0.00	0.00	-27.92	-92.09	-137.25	0.00
	Net Cash Flows from Financing Activities	C	257.81	22.54	-27.92	-92.09	-137.25	10.57
	Net Cash Flows (A+B+C)		209.19	250.83	287.36	319.26	349.62	428.49
b)     Statement of Free Cash Flows
	Year		2018	2019	2020	2021	2022	Terminal year 2023
	Net Income		205.11	248.64	289.39	322.92	350.90	426.21
Add:	Depreciation		72.00	86.40	99.36	109.30	116.95	27.36
Less:	Change(Increase) in Working Capital (Refer Working Note: 1)		-109.91	-27.59	-23.83	-15.93	-9.96	-70.49
Less:	Change(Increase) in Capital Expenditure(Refer Working Note: 2)			-	-180.00	-162.00	-124.20	-95.63	-58.48
	Free Cash Flows		167.20	127.45	202.92	292.09	362.26	324.60
	Working Note: 1	Change in Working Capital
	Year	2017	2018	2019	2020	2021	2022	Terminal year 2023
	Total Current Assets (A)	73.00	236.04	283.25	325.74	358.31	383.39	460.00
	Total Current Liability (B)	30.00	83.13	102.75	121.41	138.05	153.17	159.29
	Net Working Capital (A-B)	43.00	152.91	180.50	204.33	220.26	230.22	300.71
	Change in Working Capital		109.91	27.59	23.83	15.93	9.96	70.49
	Working Note: 2	Change in Capital Expenditure (PPE)
	Year	2017	2018	2019	2020	2021	2022	Terminal year 2023
	Gross PPE	600	900	1080	1242	1366.2	1461.83	1520.31
	Change in PPE		300	180	162	124.2	95.63	58.48
c) Equity value for Company A
	Year		2018	2019	2020	2021	2022	Terminal year 2023
A	FCFE		167.20	127.45	202.92	292.09	362.26	324.60
B	Cost of Capital (Kc)		9%	9%	9%	9%	9%	9%
C	Value of Company   (FCFE/Kc)		1857.78	1416.11	2254.67	3245.44	4025.11	3606.67
D	Number of Shares (N)		100.00	100.00	100.00	100.00	100.00	100.00
E	Equity Value per share (E=C/D)		18.58	14.16	22.55	32.45	40.25	36.07