s0 8000000

s1 9200000
a0 7000000
l0 900000
m 6%
po
r 40%
8

9 $ 8,000,000

1
0 $ 8,000,000
1 $ 8,000,00
1
Working
Capital 15000000
net income 11000000
dividend per
share 2
shares
outstanding 1000000

target debt 30%

target equity 70%

a retained earnings = capital budget x target equity percent

$ 10,500,000

b residual dividend= net income- retained earnings needed for

 capital projects
$ 500,000

dividend per share = residual dividend/ common stocks

outstanding
$ 0.50

payout ratio = residual dividend/ net income

4.55%

0
1 $ 8,000,000
2 FIN 3085

Problem: 1 MO Note:
P13- 3 DIFI Modifi
11 - ED cation
9 s in
Orang
e
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)
2
0
1
0
Net $
Sales 8
0
0.
0
Costs $
(exce 5
pt 7
depre 6.
ciatio 0
n)
Depre $
ciatio 6
n 0.
0
$
Total 6
opera 3
ting 6.
costs 0
Earni $
ng 1
befor 6
e int. 4.
& tax 0
$
Less 3
intere 2.
st 0
Earni $
ng 1
befor 3
e 2.
taxes 0
$
Taxes 5
(40%) 2.
8
Net $
incom 7
e 9.
befor 2
e
pref.
div.
$
Prefer 1.
red 4
div.
Net $
incom 7
e 7.
avail. 9
for
com.
div.
Com $
mon 3
divide 1.
nds 1
Additi $
on to 4
retain 6.
ed 7
earni
ngs

Numb
er of 1
share 0
s (in
millio
ns)
Divid $
ends 3.
per 1
share 1

Balance
Sheets for
December
31 (Millions
of Dollars)
Asset 2 Liabil 20
s 0 ities 10
1 and
0 Equit
y
Cash $ Acco
8. unts 16
0 Paya
ble
Marke Note
table 2 s 40
Secur 0. paya
ities 0 ble
Acco Accr
unts 8 uals 40
receiv 0.
able 0
Invent
ories 1 Total 96
6 curre
0. nt
0 liabili
ties
$ Long
Total 2 -term 30
curre 6 bond
nt 8. s
asset 0
s
Net Prefe
plant 6 rred 15
and 0 stock
equip 0.
ment 0
Total $ Com
Asset 8 mon 25
s 6 Stoc
 8. k
0 (Par
plus
PIC)
Retai
ned 20
earni
ngs

Com 45
mon
equit
y
Total
liabili 86
ties
and
equit
y

Projected ratios and

selected information
for the current and
projected years are
shown below.

Input A Pr Pr Pr Pr
s c oj oj oj
t ec ec ec ec
u te te te
al d d d
2 20 20 20 20
0 11 12 13 14
1
0
Sales 15 10 6
Growt % % %
h
Rate
Costs 7 72 72 72 72
/ 2 % % %
Sales %
Depre 1 10 10 10 10
ciatio 0 % % %
n/ %
Net
PPE
Cash 1 1 1 1
/ % % % %
Sales
Acct. 1 10 10 10 10
Rec. / 0 % % %
Sales %
Invent 2 20 20 20 20
ories / 0 % % %
Sales %
Net 7 75 75 75 75
PPE / 5 % % %
Sales %
Acct. 2 2 2 2
Pay. / % % % %
Sales
Accru 5 5 5 5
als / % % % %
Sales
Tax 4 40 40 40 40
rate 0 % % %
%
Weig 1 10 10 10 10
hted 0. .5 .5 .5
avera 5 % % %
ge %
cost
of
capita
l
(WAC
C)

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)
A Pr Pr Pr Pr
c oj oj oj
t ec ec ec ec
u te te te
al d d d
2 20 20 20 20
0 11 12 13 14
1
0
Net $ $ $ $
Sales 8 92 1, 1,
0 0. 01 07 13
0. 0 2. 2.
0 0 7
Costs $ $ $ $
(exce 5 66 72 77 81
pt 7 2. 8. 2.
depre 6. 4 6 4
ciatio 0
n)
Depre $ $ $ $
ciatio 6 69 75 80 85
n 0. .0 .9 .5
0
$ $ $ $
Total 6 73 80 85 90
opera 3 1. 4. 2.
ting 6. 4 5 8
costs 0
Earni $ $ $ $
ng 1 18 20 21 23
befor 6 8. 7. 9.
e int. 4. 6 5 9
& tax 0

Partial
Balance
Sheets for
December
31 (Millions
of Dollars)
A Pr Pr Pr Pr
c oj oj oj
t ec ec ec ec
u te te te
al d d d
Opera 2 20 20 20 20
ting 0 11 12 13 14
Asset 1
s 0
Cash $ $ $ $
8. 9. 10 10 11
0 2 .1 .7
Acco $ $ $ $
unts 8 92 10 10 11
receiv 0. .0 1. 7.
able 0 2 3
Invent $ $ $ $
ories 1 18 20 21 22
6 4. 2. 4.
0. 0 4 5
0
Net $ $ $ $
plant 6 69 75 80 85
and 0 0. 9. 4.
equip 0. 0 0 5
ment 0

Opera
ting
Liabili
ties
Acco $ $ $ $
unts 1 18 20 21 22
Payab 6. .4 .2 .5
le 0
Accru $ $ $ $
als 4 46 50 53 56
0. .0 .6 .6
0

Net
opera 1 22 24 25 27
ting 9 0. 2. 7.
worki 2. 8 9 5
ng 0
capita
l
Net
PPE 6 69 75 80 85
0 0. 9. 4.
0. 0 0 5
0
Net
opera 7 91 1, 1,
ting 9 0. 00 06 12
capita 2. 8 1. 2.
l 0 9 0
NOPA
T 9 11 12 13 13
8. 3. 4. 1.
4 2 5 9
Add:
Depre 6 69 75 80 85
ciatio 0. .0 .9 .5
n 0
Invest n
ment a 11 91 60 63
in 8. .1 .1
opera 8
ting
capita
l
Free n
cash a 63 10 15 16
flow .4 9. 2.
3 3
Growt n na 10 6.
h in a .0 0
FCF % %
Growt 15 10 6.
h in .0 .0 0
sales % % %

c. Calculate
operating profitability
(OP=NOPAT/Sales),
capital requirements
(CR=Operating
capital/Sales), and
return on invested
capital
(ROIC=NOPAT/Operat
ing capital at
beginning of year).
Based on the spread
between ROIC 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)?

A Pr Pr Pr Pr
c oj oj oj
t ec ec ec ec
u te te te
al d d d
2 20 20 20 20
0 11 12 13 14
1
0
Operat 1 12 12 12 12
ing 2. .3 .3 .3
profita 3 % % %
bility %

(OP=N
OPAT/
Sales)
Capita 9 99 99 99 99
l 9. .0 .0 .0
requir 0 % % %
ement %

(CR=O
perati
ng
capital
/Sales)
Return n 14 13 13 13
on a .3 .7 .2
invest % % %
ed
capital

(ROIC
=NOP
AT/Op
eratin
g
capital
at

start
of
year)
Weig n 10 10 10 10
hted a .5 .5 .5
avera % % %
ge
cost
of
capita
l
(WAC
C)
Sprea n 3. 3. 2.
d a 8 2 7
betwe % % %
en
ROIC
and
WAC
C

d. Calculate the
value of operations
(i.e. Enterprise Value
or Business Value)
and MVA. (Hint: first
calculate the horizon
value (i.e. terminal
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
(i.e. terminal growth
rate) is 6 percent.)

A Pr Pr Pr Pr
c oj oj oj
t ec ec ec ec
u te te te
al d d d
 2 20 20 20 20
0 11 12 13 14
1
0
Free
cash 63 10 15 16
flow .4 9. 2.
3 3
Long-term
constant
growth in FCF
(i.e. terminal
growth rate)
Weig 1
hted 0.
avera 5
ge %
cost
of
capita
l
(WAC
C)
Horiz
on 3,
value 58
(Term 7.
inal 2
value)
Subto
tal 63 10 3,
.4 9. 73
3 9.
5
Value
of 2,
operat 9
ions 1
(i.e. 8.
Enterp 4
rise or
Busin
ess
Value)

Opera
ting 7
capita 9
l 2.
0

Market
value 2,
added 1
(MVA= 2
Market 6.
value 4
of
compa
ny -
book
value
of
compa
ny =
Value
of
operat
ions -
Operat
ing
capital
)

e. Calculate
the price per
share of
common equity
as of
12/31/2010.

A
c
t
u
al
2
0
1
0

Value
of 2,
Opera 9
tions 1
8.
4
Plus
Value 2
of 0.
Mkt. 0
Sec.
Total
Value 2,
of 9
Comp 3
any 8.
4
Less
Value 3
of 9
Debt 6.
0
Less
Value 1
of 5.
Pref. 0
Value
of 2,
Com 5
mon 2
Equit 7.
y 4
Divid
ed by 1
numb 0
er of
share
s
Price
per 2
share 5
2.
7

NE
OLD W

14,0
00
3,900
4,500

1,50
800 0

6 6

2,00
0

1,90
0

2,90
0
 700
3
5
.
0
0
Tax rate %
1
2
.
0
0
WACC %
Depreciation: 1 2 3
2 3 1
0 2 9
. . .
0 0 2
Depn rate new 0 0 0
machine % % %

2 4 2
, , ,
8 4 6
Depn - 0 8 8
new 0 0 8
machine

6 6 6
Depn - 5 5 5
old 0 0 0
machine

2 3 2
, , ,
1 8 0
5 3 3
Change 0 0 8
in Depn

Incremental FCF after

replacement of old machine:
0 1 2 3
New Machine Cost
(
1
4
,
0
0
 0
)

4
,
5
0
Sale of old Machine 0

(
2
1
0
Tax on sale of old machine )

2 2 2
, , ,
0 0 0
0 0 0
0 0 0
Increased Sales Revenues

1 1 1
, , ,
9 9 9
0 0 0
0 0 0
Decreased OPEX

( ( (
2 3 2
, , ,
1 8 0
5 3 3
Change in Depn (new vs. 0 0 8
old) ) ) )

1 1
, ,
7 8
Change in 5 7 6
Operating 0 0 2
Income

6 6
1 2 5
3 5 2
Taxes
Change in After-
 1 1
, ,
1 2
3 4 1
Tax Operating 8 6 0
Income

2 3 2
, , ,
1 8 0
5 3 3
0 0 8
Add back: Change in Depn

(
2
,
2
0
0
Change in Working Capital )

Sale (salvage value) of new

machine

Tax on sale of new machine

Opportunity cost of not

selling old machine YR 6

Tax effect of opportunity cost

of not selling old machine YR
6        
Incremental Free Cash Flow
( 3 3 3
1 , , ,
1 2 8 2
, 8 7 4
9 8 6 8
 1
0
)

$
2
,
5
3
8
.
8
NPV 5

1
3 $ 8,000,000

1
4 $ 8,000,000

1
5 $ 8,000,000
notes payable 500,000
accrurals Cash
1
4
9

4
0
 0

Receivables
and 1
Inventory 5
6

0
0
0

Property,
Plant and 2
Equipm
1
Year 8
0
0
0
10
0
2

10

11

12

13
 14

15

16

17

18

19

20
ent
Investment
in Seguros 1

1
9
2

0
0
0

Trademark
3
7
2

0
0
0
after tax profit margin 6%
payout ratio 40%
(spontaneo
us liabilites
do not
count
notes
payable)
Additional Funds Needed = Increase in Assets - Increase in Spontaneous Liabilities -
Increase in Retained Earnings

-
1 3
3 3
5 1
0 2
0 0
1050000 0 0

5
8
3
8
0
0

The AFN in problem 2 is higher than the one found in problem 1 for several reasons. First, from a mathmatical presepe
this is the case because the assets portion was increased while the increase in spontaneous liabillites and increase in
 retained earnings portions stayed the same. From a logical prespectiv
Plan A Plan B
Year
$ $
0 (50,000,000) (15,000,000)
1 $ 8,000,000 $ 3,400,000
2 $ 8,000,000 $ 3,400,000
3 $ 8,000,000 $ 3,400,000
4 $ 8,000,000 $ 3,400,000
5 $ 8,000,000 $ 3,400,000
6 $ 8,000,000 $ 3,400,000
7 $ 8,000,000 $ 3,400,000
8 $ 8,000,000 $ 3,400,000
9 $ 8,000,000 $ 3,400,000
10 $ 8,000,000 $ 3,400,000
11 $ 8,000,000 $ 3,400,000
12 $ 8,000,000 $ 3,400,000
13 $ 8,000,000 $ 3,400,000
14 $ 8,000,000 $ 3,400,000
15 $ 8,000,000 $ 3,400,000
16 $ 8,000,000 $ 3,400,000
17 $ 8,000,000 $ 3,400,000
18 $ 8,000,000 $ 3,400,000
19 $ 8,000,000 $ 3,400,000
20 $ 8,000,000 $ 3,400,000
e, you are going to need more additonal funds than before becasue the requoired increase in assets that the comapny
needs increased by 2,000,000 dollars. This can only be provided by greater additonal funding. Also, the capital intensity
ratio is differnt than before due to these changes as it incrreases due to the increase in assets (which is the numerator)

sales growth per year

sales 2012

sales 2013
assets (end of 2012)
 assert growth per year

current liabilities

accounts payable

notes payable

accrurals

after tax profit margin

payout ratio

Additional Funds Needed = Increase in Assets - Increase in Spontaneous Liabilities - Increase in Retained Earnings

The AFN in problem 2 is higher than the one found in problem 1 for several reasons. First, from a mathmatical presepect
funds than before becasue the requoired increase in assets that the comapny needs increased by 2,000,000 dollars. Thi
sales in 2012
2012 year end assets
 profit margin
payout ratio

self-supporting growth= (profit margin(1- payout ratio))(sales)

4.05%

Sales Increase
The War of 1812 (18 June 1812 – 17 February 1815) was fought by the United States of
America and its indigenous allies against the United Kingdom and its allies in British North America,
with limited participation by Spain in Florida. It began when the US declared war on 18 June 1812
and, although peace terms were agreed upon in the December 1814 Treaty of Ghent, did not
officially end until the peace treaty was ratified by Congress on 17 February 1815.[12][13]
Tensions originated in long-standing differences over territorial expansion in North America and
British support for Native American tribes who opposed US colonial settlement in the Northwest
Territory. These escalated in 1807 after the Royal Navy began enforcing tighter restrictions on
American trade with France, exacerbated by the impressment of men claimed as British subjects,
even those with American citizenship certificates. [14] Opinion was split on how to respond, and
although majorities in both the House and Senate voted for war, they divided along strict party lines,
with the Democratic-Republican Party in favour and the Federalist Partyagainst.[d][15] News of British
concessions made in an attempt to avoid war did not reach the US until late July, by which time the
conflict was already underway.
At sea, the far larger Royal Navy imposed an effective blockade on US maritime trade, while
between 1812 to 1814 British regulars and colonial militia defeated a series of American attacks
on Upper Canada.[16] This was balanced by the US winning control of the Northwest Territory with
victories at Lake Erie and the Thames in 1813. The abdication of Napoleon in early 1814 allowed the
British to send additional troops to North America and the Royal Navy to reinforce their blockade,
crippling the American economy.[17] In August 1814, negotiations began in Ghent, with both sides
wanting peace; the British economy had been severely impacted by the trade embargo, while the
Federalists convened the Hartford Convention in December to formalise their opposition to the war.
In August 1814, British troops burned Washington, before American victories
at Baltimore and Plattsburgh in September ended fighting in the north. It continued in
the Southeastern United States, where in late 1813 a civil war had broken out between
a Creek faction supported by Spanish and British traders and those backed by the US. Supported by
American militia under General Andrew Jackson, they won a series of victories, culminating in the
capture of Pensacola in November 1814.[18] In early 1815, Jackson defeated a British attack on New
Orleans, catapulting him to national celebrity and later victory in the 1828 United States presidential
election.[19] News of this success arrived in Washington at the same time as that of the signing of the
Treaty of Ghent, which essentially restored the position to that prevailing before the war. While
Britain insisted this included lands belonging to their Native American allies prior to 1811, Congress
did not recognize them as independent nations and neither side sought to enforce this requirement.