EASTBORO MACHINE TOOLS CORPORATION

Forecast of Financing Need

According to Dividend Policy

Common Assumptions
1 Sales Growth 15.0%
2 Net Income Margin 2.1% 4.0% 5.0% 5.5% 6.0% 5.6% 8.0%
3 Dividend Payout 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%
4 Beginning Debt 80.3
5 Beginning Equity 282.5
6 Shares Outstanding 18.6
7 Price Earnings Ratio 33.0
8 Current Market Price $22.15
9 Debt/Equity Maximum 40.0%
10 Borrowing Rate 8.0%
11 Tax Rate 34.0%

2001 2002 2003 2004 2005 2006 2007

13 Sales $870.0 $1,000.5 $1,150.6 $1,323.2 $1,521.6 $1,749.9 $2,012.4

Sources:
14 Net Income 18.1 40.0 57.5 72.8 91.3 98.0 160.0
15 Depreciation 22.5 25.5 30.0 34.5 40.5 46.5 52.5
16 Total Sources 40.6 65.5 87.5 107.3 131.8 144.5 212.5

Uses:
17 Capital Expenditures 43.8 50.4 57.5 66.2 68.5 78.8 90.6
18 Working Capital 19.5 22.4 25.8 29.6 34.0 38.5 44.3
19 Total Uses 63.3 72.8 83.3 95.8 102.4 117.3 134.9

20 Excess Cash (Borrowings) (22.7) (7.3) 4.2 11.5 29.4 27.2 77.6
21 Dividends 3.6 8.0 11.5 14.6 18.3 19.6 32.0
22 Net (26.3) (15.3) (7.3) (3.0) 11.1 7.6 45.6
23 Cumulative Source (Need) (26.3) (41.6) (48.9) (51.9) (40.8) (33.2) 12.4
24 Int. Cost-New Debt (1.4) (2.2) (2.6) (2.7) (2.2) (1.8) 0.7
25 Net Source (Need) (27.7) (43.8) (51.5) (54.7) (43.0) (35.0) 13.1
26 Debt (Excess) 108.0 125.5 135.3 141.1 132.2 126.3 80.0
Stock buy back
27 Equity 295.6 325.4 368.9 424.4 495.2 571.9 700.5
28 Debt/Equity 36.5% 38.5% 36.7% 33.3% 26.7% 22.1% 11.4%
29 Unused Debt Capacity 10.3 4.7 12.2 28.6 65.9 102.4 200.2
30 Return on Avg. Equity 5.8% 12.2% 15.8% 17.7% 19.4% 18.0% 25.2%
31 EPS $0.90 $2.03 $2.95 $3.77 $4.79 $5.17 $8.64
32 Implied Stock Price $29.64 $67.11 $97.49 $124.25 $158.15 $170.75 $285.00
33 Dividends Per Share $0.19 $0.43 $0.62 $0.78 $0.98 $1.05 $1.72

Return to Investor:
34 Stock Value (Terminal) $0.00 $0.00 $0.00 $0.00 $0.00 $0.00 $285.00
35 Dividend Received $0.19 $0.43 $0.62 $0.78 $0.98 $1.05 $1.72
36 Total Cap. Apprec. & Divs ($22.15) $0.19 $0.43 $0.62 $0.78 $0.98 $1.05 $286.72
37 NPV (@ 12%) $110.09
38 Return (IRR) 45.1%

Sensitivity of PV to Dividend Payout 40% 40% 40% 40% 40%

Dividend Payout Ratio PV 2001 2002 2003 2004 2005
110.09 $0.40 0.0%
- 10%
0.10 20%
0.20 30%
0.30 40%
0.40
2001-2007

537.6929
252.0

669.8

119.9
107.5
12.40
 -12.17

80.03

700.53
11.425%
200.18

40%
2007
 11

0
0.1
0.2
0.3
0.4

Page 5
 EASTBORO MACHINE TOOLS CORPORATION
Common Assumptions
1 Sales Growth 15.0%
2 Net Income Margin 2.1% 4.0% 5.0% 5.5%
3 Dividend Payout 40.0% 40.0% 40.0% 40.0%
4 Beginning Debt 80.3
5 Beginning Equity 282.5
6 Shares Outstanding 18.6
7 Price Earnings Ratio 33.0
8 Current Market Price $22.15
9 Debt/Equity Maximum 40.0%
10 Borrowing Rate 8.0%
11 Tax Rate 34.0%

2001 2002 2003 2004

13 Sales $870.0 $1,000.5 $1,150.6 $1,323.2

Sources:
14 Net Income 18.1 40.0 57.5 72.8
15 Depreciation 22.5 25.5 30.0 34.5
16 Total Sources 40.6 65.5 87.5 107.3

Uses:
17 Capital Expenditures 43.8 50.4 57.5 66.2
18 Working Capital 19.5 22.4 25.8 29.6
19 Total Uses 63.3 72.8 83.3 95.8

20 Excess Cash (Borrowings) (22.7) (7.3) 4.2 11.5

21 Dividends 7.2 16.0 23.0 29.1
22 Net (29.9) (23.3) (18.8) (17.6)
23 Cumulative Source (Need) (29.9) (53.2) (72.0) (89.6)
24 Int. Cost-New Debt (1.6) (2.8) (3.8) (4.7)
25 Net Source (Need) (31.5) (56.0) (75.8) (94.4)
26 Debt (Excess) 111.8 137.9 160.5 182.8
27 Equity 291.8 313.0 343.7 382.7
28 Debt/Equity 38.3% 44.0% 46.7% 47.8%
29 Unused Debt Capacity 4.9 (12.7) (23.0) (29.8)

30 Return on Avg. Equity 5.8% 12.3% 16.4% 18.7%

31 EPS $0.89 $2.00 $2.89 $3.66
32 Implied Stock Price $29.30 $66.02 $95.32 $120.72
33 Dividends Per Share $0.39 $0.86 $1.24 $1.57

Return to Investor:
34 Stock Value (Terminal) $0.00 $0.00 $0.00 $0.00
35 Dividend Received $0.39 $0.86 $1.24 $1.57
36 Total Cap. Apprec. & Divs. ($22.15) $0.39 $0.86 $1.24 $1.57
37 NPV (@ 12%) $108.86
38 Return (IRR) 45.5%

Sensitivity of PV to Dividend Payout

Dividend Payout Ratio PV

-
0.10
0.20
0.30
0.40
PORATION

6.0% 5.6% 8.0%

40.0% 40.0% 40.0%

Total
2005 2006 2007 2001-07
$1,521.6 $1,749.9 $2,012.4

50
91.3 98.0 160.0 537.7
40.5 46.5 52.5 252.0
131.8 144.5 212.5 789.7

68.5 78.8 90.6

34.0 38.5 44.3
102.4 117.3 134.9 669.8

29.4 27.2 77.6 119.9

36.5 39.2 64.0 (215.1)
(7.2) (12.0) 13.6 (95.1)
(96.8) (108.8) (95.1)
(5.1) (5.7) (5.0) (28.8)
(101.9) (114.5) (100.2)
195.1 212.8 204.2 204.2
432.3 485.4 576.4 576.4
45.1% 43.8% 35.4% 35.4%
(22.2) (18.7) 26.3 26.3

21.2% 20.1% 29.2%

$4.63 $4.96 $8.33
$152.91 $163.67 $274.93
$1.96 $2.11 $3.44

$0.00 $0.00 $274.93

$1.96 $2.11 $3.44
$1.96 $2.11 $278.37
 EASTBORO MACHINE TOOLS CORPORATION
Common Assumptions
1 Sales Growth 15.0%
2 Net Income Margin (1 % less) 1.1% 3.0% 4.0% 4.5%
3 Dividend Payout 20.0% 0.0% 0.0% 17.7%
4 Beginning Debt 80.3
5 Beginning Equity 282.5
6 Shares Outstanding 18.6
7 Price Earnings Ratio (2) 33.0
8 Current Market Price $22.15
9 Debt/Equity Maximum 40.0%
10 Borrowing Rate 8.0%
11 Tax Rate 34.0%
2001 2002 2003 2004
13 Sales $870.0 $1,000.5 $1,150.6 $1,323.2

Sources:
14 Net Income 9.4 30.0 46.0 59.5
15 Depreciation 22.5 25.5 30.0 34.5
16 Total Sources 31.9 55.5 76.0 94.0

Uses:
17 Capital Expenditures 43.8 50.4 57.5 66.2
18 Working Capital 19.5 22.4 25.8 29.6
19 Total Uses 63.3 72.8 83.3 95.8

20 Excess Cash (Borrowings) (31.4) (17.3) (7.3) (1.7)

21 Dividends 1.9 0.0 0.0 10.6
22 Net (33.3) (17.3) (7.3) (12.3)
23 Cumulative Source (Need) (33.3) (50.6) (57.9) (70.1)
24 Int. Cost-New Debt (1.8) (2.7) (3.1) (3.7)
25 Net Source (Need) (35.0) (53.2) (60.9) (73.8)
26 Debt (Excess) 115.3 135.3 145.6 161.6
27 Equity 288.3 315.6 358.6 403.9
28 Debt/Equity 40.0% 42.9% 40.6% 40.0%
29 Unused Debt Capacity (0.0) (9.0) (2.2) (0.1)

30 Return on Avg. Equity 2.7% 9.1% 12.7% 14.6%

31 EPS $0.41 $1.47 $2.31 $3.00
32 Implied Stock Price (3) $13.55 $48.52 $76.23 $99.07
33 Dividends Per Share $0.10 $0.00 $0.00 $0.57

Return to Investor:
34 Stock Value (Terminal) $0.00 $0.00 $0.00 $0.00
35 Dividend Received $0.10 $0.00 $0.00 $0.57
36 Total Cap. Apprec. & Divs ($22.15) $0.10 $0.00 $0.00 $0.57
37 NPV (@ 12%) $79.47
38 Return (IRR) 41.3%

Sensitivity of PV to Dividend Payout

Dividend Payout Ratio PV
$79.47
- $ 101.08
0.10 100.52
0.20 99.96
0.30 99.40
0.40 98.84
RPORATION

5.0% 4.6% 7.0%

36.0% 44.3% 45.4%
I start with 20% dividend policy and find
it is causing to exceed D/E beyond 40%

You can keep the same rate used in 20% a

40% dividend policy

2005 2006 2007 2001-07

$1,521.6 $1,749.9 $2,012.4

76.1 80.5 139.9 441.4

40.5 46.5 52.5 252.0
116.6 127.0 192.4 693.4

68.5 78.8 90.6

34.0 38.5 44.3
102.4 117.3 134.9 669.8

14.1 9.7 57.5 23.7

1. click on the cell where Debt/Equity is given
27.4 35.7 63.5 (139.0)
(13.3) (26.0) (6.0) (115.3) 2. Go to Data and goal seek within the What if
(83.4) (109.4) (115.3) Analysis
(4.4) (5.8) (6.1) (27.5)
(87.8) (115.1) (121.4) 3.It asks for Set Cell, you click again the
179.3 211.0 223.1 223.1 Debt/Equity cell which would like to measure at
40%
448.1 487.2 557.5 557.5
40.0% 43.3% 40.0% 40.0% 4. in the To Value, write 40%
(0.1) (16.2) (0.1) (0.1)
5. In the By Changing Cell, press the dividend
16.8% 16.0% 25.6% payour for that particular year.
$3.85 $4.02 $7.19
$127.17 $132.57 $237.33
$1.47 $1.92 $3.41

$0.00 $0.00 $237.33

$1.47 $1.92 $3.41
$1.47 $1.92 $240.74
idend policy and find that
d D/E beyond 40%

me rate used in 20% and

y

bt/Equity is given

within the What if

ck again the
d like to measure at

press the dividend

ar.