(13-11);Build a Model;Corporate Valuation;Start with the partial model in the file Ch13 P11 Build a Model.xls on the textbook?s;Web site. The Henley Corporation is a privately held company specializing in lawn;care products and services. The most recent financial statements are shown below.;Income Statement for the Year Ending December 31 (Millions of Dollars Except for;Per Share Data);2010;Net sales $ 800.0;Costs (except depreciation) 576.0;Depreciation 60.0;Total operating costs $ 636.0;Earnings before interest and taxes $ 164.0;Less interest 32.0;Earnings before taxes $ 132.0;Taxes (40%) 52.8;Net income before preferred dividends $ 79.2;Preferred dividends 1.4;Net income available for common dividends $ 77.9;Common dividends $ 31.1;Addition to retained earnings $ 46.7;Number of shares (in millions) 10;Dividends per share $ 3.11;Balance Sheet for December 31 (Mi llions of Dol lars);2010 2010;Assets Liabilities and Equity;Cash $ 8.0 Accounts payable $ 16.0;Marketable securities 20.0 Notes payable 40.0;Accounts receivable 80.0 Accruals 40.0;Inventories 160.0 Total current liabilities $ 96.0;Total current assets $268.0 Long-term bonds 300.0;Net plant and equipment 600.0 Preferred stock 15.0;Common stock (par plus PIC) 257.0;Retained earnings 200.0;Common equity $457.0;Total assets $868.0 Total liabilities and equity $868.0;Projected ratios and selected information for the current and projected years are;shown below.;Actual Projected;2010 2011 2012 2013 2014;Sales growth rate 15% 10% 6% 6%;Costs/Sales 72% 72 72 72 72;Depreciation/Net PPE 10 10 10 10 10;Cash/Sales 1 1 1 1 1;resource;Chapter 13: Corporate Valuation, Value-Based Management and Corporate Governance 553;9781133665007, Financial Management: Theory and Practice, Michael C. Ehrhardt - ? Cengage Learning.;r igthuts Noa diastrnibu tikoni arllkowked h ovut aeuthto riozatsion;Actual Projected;2010 2011 2012 2013 2014;Accounts receivable/Sales 10% 10% 10% 10% 10%;Inventories/Sales 20 20 20 20 20;Net PPE/Sales 75 75 75 75 75;Accounts payable/Sales 2 2 2 2 2;Accruals/Sales 5 5 5 5 5;Tax rate 40 40 40 40 40;Weighted average cost of;capital (WACC) 10.5 10.5 10.5 10.5 10.5;a. Forecast the parts of the income statement and balance sheet that are necessary for;calculating free cash flow.;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 (that is, the same as the;constant growth rate in sales) by the end of the forecast period.;c. Calculate operating profitability (OP = NOPAT/Sales), capital requirements (CR =;Operating capital/Sales), and expected return on invested capital (EROIC = Expected;NOPAT/Operating capital at beginning of year). Based on the spread between EROIC;and WACC, do you think that the company will have a positive Market Value Added;(MVA = Market value of company? Book value of company = Value of operations?;Operating capital)?;d. Calculate the value of operations and MVA. (Hint: First calculate the horizon value at;the end of the forecast period, which is equal to the value of operations at the end of;the forecast period.) Assume that the annual growth rate beyond the horizon is 6%.;e. Calculate the price per share of common equity as of 12/31/2010.;PROBLEMS 1?5;(14?1);Residual Distribution;Model;Axel Telecommunications has a target capital structure that consists of 70% debt and;30% equity. The company anticipates that its capital budget for the upcoming year;will be $3 million. If Axel reports net income of $2 million and follows a residual;distribution model with all distributions as dividends, what will be its dividend payout;ratio?;(14?2);Residual Distribution;Policy;Petersen Company has a capital budget of $1.2 million. The company wants to maintain;a target capital structure which is 60% debt and 40% equity. The company forecasts;that its net income this year will be $600,000. If the company follows a residual;distribution model and pays all distributions as dividends, what will be its payout ratio?;(14?3);Dividend Payout;The Wei Corporation expects next year?s net income to be $15 million. The firm?s;debt ratio is currently 40%. Wei has $12 million of profitable investment opportunities;and it wishes to maintain its existing debt ratio. According to the residual distribution;model (assuming all payments are in the form of dividends), how large;should Wei?s dividend payout ratio be next year?;(14?4);Stock Repurchase;A firm has 10 million shares outstanding with a market price of $20 per share. The;firm has $25 million in extra cash (short-term investments) that it plans to use in a;stock repurchase, the firm has no other financial investments or any debt. What is;the firm?s value of operations, and how many shares will remain after the repurchase?;(14?5);Stock Split;Gamma Medical?s stock trades at $90 a share. The company is contemplating a;3-for-2 stock split. Assuming the stock split will have no effect on the total market;value of its equity, what will be the company?s stock price following the stock split?
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