Corporate

Finance @
EDHEC

Prof. Schroth
Corporate Finance 1
Home Net
Spreadsheets MSc inFinance
Growing
Annuitities
EDHEC Business School
Net Working
Capital
Calculations
Enrique Schroth

Professor of Finance
EDHEC Business School

Lecture 2: Revision exercises

6 October 2022

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 HomeNet Example Spreadsheets

Corporate
Finance @
EDHEC

Prof. Schroth

Home Net
Spreadsheets
1 Open and navigate the file
Growing
’CF1 EDHEC SreadsheetsL2.xls’ posted on Blackboard
Annuitities
2 Understand the formulae, which link the assumptions to
Net Working
Capital the earnings forecasts
Calculations
3 Work your way down to Table 5 (NPV calculation)
4 Understand the calculation of the IRR using Excel’s
‘Goal-Seek’ method or the IRR() function

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 Perpetual values

Corporate
Finance @
EDHEC

Prof. Schroth

Home Net
• We can calculate the present value of cash flows that
Spreadsheets
grow permanently at a fixed rate (a growing annuity
Growing
Annuitities after a certain horizon
Net Working • Suppose that a project returns a cash flow that grows at a
Capital
Calculations rate g each year, starting from £C in one year’s time

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 Perpetual values

Corporate
Finance @
EDHEC For a horizon T and r > g then
Prof. Schroth
C C × (1 + g ) C × (1 + g )2
Home Net PV = + + +
Spreadsheets 1+r (1 + r )2 (1 + r )3
Growing
Annuitities C × (1 + g )T −1
... +
Net Working (1 + r )T
Capital
Calculations

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 Perpetual values

Corporate
Finance @
EDHEC For a horizon T and r > g then
Prof. Schroth
C C × (1 + g ) C × (1 + g )2
Home Net PV = + + +
Spreadsheets 1+r (1 + r )2 (1 + r )3
Growing
Annuitities C × (1 + g )T −1
... +
Net Working (1 + r )T
Capital
Calculations C 1+g T
= × [1 − ( ) ]
r −g 1+r

For a permanent horizon (T → ∞)

C
PV =
r −g

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 Example: Continuation values

Corporate
Finance @
EDHEC

Prof. Schroth

Home Net Exercise: Plentix is considering a new project that costs $200
Spreadsheets
million and will generate free cash flows in its first three years
Growing
Annuitities of $10 million, $15 million, and $20 million, respectively. After
Net Working the third year, free cash flows are expected to grow at an
Capital
Calculations annual rate of 7%. Plentix’s has determined that the
appropriate cost of capital for this project is 16%.
⇒ What is the year 3 continuation value?
⇒ What is the NPV of the project?

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 Example: Continuation values (cont’d.)

Corporate
Finance @
EDHEC
Solution: The year 3 continuation value (CV) is calculated as:
Prof. Schroth

Home Net
Free cash flow in year 3 × (1 + g )
Spreadsheets Year 3 CV =
r −g
Growing
Annuitities $20 M × (1 + 0.7)
= = $237.78 M.
Net Working
Capital
0.16 − 0.07
Calculations

The NPV of the project is therefore

$10 M $15 M $20 M + $237.78 M

NPV = −$200 M + + +
1.16 1.162 1.163
= −$15.08 M.

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 Exercise: Net Working Capital

Corporate
Finance @
EDHEC Exercise: Rising Star Inc is forecasting that their sales will
Prof. Schroth
increase by $250,000 next year, $275,000 the following year,
Home Net and $300,000 in the third year. The company estimates that
Spreadsheets
additional cash requirements will be:
Growing
Annuitities 1 5% of the change in sales,
Net Working
Capital 2 inventory will increase by 7% of the change in sales,
Calculations
3 receivables will increase by 10% of the change in sales, and
4 payables will increase by 8% of the increase in sales.
⇒ Forecast the increase in net working capital for Rising Star
over the next three years.
⇒ Compare your answer to the spreadsheet on
‘CF1 EDHEC SreadsheetsL2.xls’ posted on Blackboard.

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