Upload
inzhu-sarinzhip
View
124
Download
10
Embed Size (px)
Citation preview
FIRST FINANCIAL MODELSales growth 10%Current assets/Sales 15%Current liabilities/Sales 8%Net fixed assets/Sales 77%Costs of goods sold/Sales 50%Depreciation rate 10%Interest rate on debt 10.00%Interest paid on cash and marketable securities 8.00%Tax rate 40%Dividend payout ratio 40%
Year 0 1 2 3Income statementSales 1,000 1,100 1,210 1,331 Costs of goods sold (500) (550) (605) (666)Interest payments on debt (32) (32) (32) (32)Interest earned on cash and marketable securities 6 9 14 20 Depreciation (100) (117) (137) (161)Profit before tax 374 410 450 492 Taxes (150) (164) (180) (197)Profit after tax 225 246 270 295 Dividends (90) (98) (108) (118)Retained earnings 135 148 162 177
Balance sheetCash and marketable securities 80 144 213 289 Current assets 150 165 182 200 Fixed assets At cost 1,070 1,264 1,486 1,740 Depreciation (300) (417) (554) (715) Net fixed assets 770 847 932 1,025 Total assets 1,000 1,156 1,326 1,513
Current liabilities 80 88 97 106 Debt 320 320 320 320 Stock 450 450 450 450 Accumulated retained earnings 150 298 460 637 Total liabilities and equity 1,000 1,156 1,326 1,513
Year 0 1 2 3 Free cash flow calculationProfit after tax 246 270 295 Add back depreciation 117 137 161 Subtract increase in current assets (15) (17) (18)Add back increase in current liabilities 8 9 10 Subtract increase in fixed assets at cost (194) (222) (254)Add back after-tax interest on debt 19 19 19 Subtract after-tax interest on cash and+A14 mkt. securities (5) (9) (12)Free cash flow 176 188 201
CONSOLIDATED STATEMENT OF CASH FLOWS: RECONCILING THE CASH BALANCES Cash flow from operating activities
Profit after tax 246 270 295 Add back depreciation 117 137 161 Adjust for changes in net working capital: Subtract increase in current assets (15) (17) (18) Add back increase in current liabilities 8 9 10 Net cash from operating activities 356 400 448
Cash flow from investing activitiesAquisitions of fixed assets--capital expenditures (194) (222) (254)Purchases of investment securities 0 0 0Proceeds from sales of investment securities 0 0 0Net cash used in investing activities (194) (222) (254)
Cash flow from financing activitiesNet proceeds from borrowing activities 0 0 0Net proceeds from stock issues, repurchases 0 0 0Dividends paid (98) (108) (118)Net cash from financing activities (98) (108) (118)
Net increase in cash and cash equivalents 64 70 76 Check: changes in cash and mkt. securities 64 70 76
FIRST FINANCIAL MODEL
4 5
1,464 1,611 #VALUE! (732) (805) #VALUE! (32) (32) #VALUE! 26 33 #VALUE! (189) (220) #VALUE! 538 587 #VALUE! (215) (235) #VALUE! 323 352 #VALUE! (129) (141) #VALUE! 194 211 #VALUE!
371 459 #VALUE! 220 242 #VALUE!
2,031 2,364 #VALUE! (904) (1,124) #VALUE! 1,127 1,240 #VALUE! 1,718 1,941 #VALUE!
117 129 #VALUE! 320 320 #VALUE! 450 450 #VALUE! 830 1,042 #VALUE! 1,718 1,941 #VALUE!
4 5
323 352 #VALUE!189 220 #VALUE!(20) (22) #VALUE!11 12 #VALUE!
(291) (333) #VALUE!19 19 #VALUE!
(16) (20) #VALUE!214 228 #VALUE!
CONSOLIDATED STATEMENT OF CASH FLOWS: RECONCILING THE CASH BALANCES
323 352 #VALUE! 189 220 #VALUE!
(20) (22) #VALUE! 11 12 #VALUE! 502 562 #VALUE!
(291) (333) #VALUE!0 0 <-- Not in our model 0 0 <-- Not in our model
(291) (333) #VALUE!
0 0 #VALUE!0 0 #VALUE!
(129) (141) #VALUE!(129) (141) #VALUE!
82 88 #VALUE! 82 88 #VALUE!
FIRST FINANCIAL MODEL
Sales growth 10%Current assets/Sales 15%Current liabilities/Sales 8%Net fixed assets/Sales 77%Costs of goods sold/Sales 50%Depreciation rate 10%Interest rate on debt 10.00%Interest paid on cash and marketable secu 8.00%Tax rate 40%Dividend payout ratio 40%
Year 0 1 2 3 4Income statementSales 1,000 1,000 1,000 1,000 1,000 Costs of goods sold (770) (770) (770) (770) (770)Interest payments on debt 49 49 49 49 49 Interest earned on cash and marketable se 8 9 6 (10) (48)Depreciation (100) (253) (422) (704) (1,173)Profit before tax 187 35 (137) (434) (941)Taxes (15) (3) 11 35 75 Profit after tax 172 32 (126) (400) (866)Dividends (69) (13) 50 160 346 Retained earnings 103 19 (76) (240) (520)
Balance sheetCash and marketable securities 80 99 23 (216) (736)Current assets 100 100 100 100 100 Fixed assets At cost 380 633 1,056 1,759 2,932 Depreciation (300) (553) (976) (1,679) (2,852) Net fixed assets 80 80 80 80 80 Total assets 260 279 203 (36) (556)
Current liabilities 150 150 150 150 150 Debt (490) (490) (490) (490) (490)Stock 450 450 450 450 450 Accumulated retained earnings 150 169 93 (146) (666)Total liabilities and equity 260 279 203 (36) (556)
Year 0 1 2 3 4 Free cash flow calculationProfit after tax 32 (126) (400) (866)Add back depreciation 253 422 704 1173 Subtract increase in current assets 0 0 0 0
Here's a basic exercise that will help you understand what's going on in the modeling of financial statements. Replicate the models in sections 3.2, 3.7, and 3.8 (First Financial Model). That is, enter the correct formulas for the cells and see that you get the same results as the book. (This turns out to be more of an exercise in accounting than in finance. If you're like many financial modelers, you'll see that there are some aspects of accounting that you've forgotten!)
Add back increase in current liabilities 0 0 0 0 Subtract increase in fixed assets at cost (253) (422) (704) (1173)Add back after-tax interest on debt (45) (45) (45) (45)Subtract after-tax interest on cash and+A14 mkt. secu (8) (6) 9 44 Free cash flow (21) (177) (436) (867)
CONSOLIDATED STATEMENT OF CASH FLOWS: RECONCILING THE CASH BALANCES Cash flow from operating activitiesProfit after tax 32 (126) (400) (866)Add back depreciation 253 422 704 1,173 Adjust for changes in net working capital: Subtract increase in current assets - - - - Add back increase in current liabilities - - - - Net cash from operating activities 285 296 304 307
Cash flow from investing activitiesAquisitions of fixed assets--capital expenditures (253) (422) (704) (1,173)Purchases of investment securities 0 0 0 0Proceeds from sales of investment securities 0 0 0 0Net cash used in investing activities (253) (422) (704) (1,173)
Cash flow from financing activitiesNet proceeds from borrowing activities 0 0 0 0Net proceeds from stock issues, repurchases 0 0 0 0Dividends paid (13) 50 160 346 Net cash from financing activities (13) 50 160 346
Net increase in cash and cash equivalents 19 (76) (240) (520)Check: changes in cash and mkt. securities 19 (76) (240) (520)
5
1,000 #VALUE! (770) #VALUE! 49 #VALUE! (123) #VALUE! (1,955) #VALUE! (1,799) #VALUE! 144 #VALUE! (1,655) #VALUE! 662 #VALUE! (993) #VALUE!
(1,729) #VALUE! 100 #VALUE!
4,887 #VALUE! (4,807) #VALUE! 80 #VALUE! (1,549) #VALUE!
150 #VALUE! (490) #VALUE! 450 #VALUE! (1,659) #VALUE! (1,549) #VALUE!
5
(1655) #VALUE!1955 #VALUE!
0 #VALUE!
Here's a basic exercise that will help you understand what's going on in the modeling of financial statements. Replicate the models in sections 3.2, 3.7, and 3.8 (First Financial Model). That is, enter the correct formulas for the cells and see that you get the same results as the book. (This turns out to be more of an exercise in accounting than in finance. If you're like many financial modelers, you'll see that there are some aspects of
0 #VALUE!(1955) #VALUE!
(45) #VALUE!113 #VALUE!
(1587) #VALUE!
CONSOLIDATED STATEMENT OF CASH FLOWS: RECONCILING THE CASH BALANCES
(1,655) #VALUE! 1,955 #VALUE!
- #VALUE! - #VALUE! 300 #VALUE!
(1,955) #VALUE!0 <-- Not in our model 0 <-- Not in our model
(1,955) #VALUE!
0 #VALUE!0 #VALUE!
662 #VALUE!662 #VALUE!
(993) #VALUE! (993) #VALUE!
EXERCISE 2
Sales growth 10%Current assets/Sales 15%Current liabilities/Sales 8%Net fixed assets/Sales 77%Costs of goods sold/Sales 50%Sales, general and administrative expenses 200 <-- AddedDepreciation rate 10%Interest rate on debt 10.00%Interest paid on cash & marketable securities 8.00%Tax rate 40%Dividend payout ratio 40%
Year 0 1 2 3Income statementSales 1,000 1,150 1,210 1,331 Costs of goods sold (500) (575) (605) (666)SG&A (600) (200) (200)Interest payments on debt (32) (32) (32) (32)Interest earned on cash & marketable securities 6 11 16 16 Depreciation (100) (117) (137) (161)Profit before tax 374 412 251 289 Taxes (150) (163) (96) (111)Profit after tax 225 249 155 178 Dividends (90) (50) (58) (67)Retained earnings 135 200 97 111
Balance sheetCash and marketable securities 80 196 200 210 Current assets 150 173 182 200 Fixed assets At cost 1,070 1,264 1,486 1,740 Depreciation (300) (417) (554) (715) Net fixed assets 770 847 932 1,025 Total assets 1,000 1,215 1,314 1,434
Current liabilities 80 92 97 106 Debt 320 320 320 320 Stock 450 450 450 450 Accumulated retained earnings 150 350 447 558 Total liabilities and equity 1,000 1,208 1,314 1,434
Year 0 1 2 3
The model of section 3.2 includes cost of goods sold but not selling, general, and administrative (SG&A) expenses. Suppose that the firm has $200 of these expenses each year, irrespective of the level of sales. a. Change the model to accommodate this new assumption. Show the resulting profit and loss statements, balance sheets, free cash flows, and valuation. b. Create a data table in which you show the sensitivity of the equity value to the level of SG&A. Let SG&A vary from 0 to $500 per year.
Free cash flow calculationProfit after tax 249 155 178 Add back depreciation 117 137 161 Subtract increase in current assets (15) (17) (18)Add back increase in current liabilities 8 9 10 Subtract increase in fixed assets at cost (194) (222) (254)Add back after-tax interest on debt 19 19 19 Subtract after-tax interest on cash & mkt. securities (4) (3) (3)Free cash flow 181 79 92
Valuing the firmWeighted average cost of capital 20%
Year 0 1 2 3 FCF 181 79 92 Terminal valueTotal 181 79 92
NPV of row 61 894 <-- =NPV(B56,C61:G61)Add in initial (year 0) cash and mkt. securities 80Enterprise value 974Subtract out value of firm's debt today -320Equity value 654
Cash and marketable securities as negative debtNPV of row 61 = enterprise value 894Net year 0 debt -240 <-- =-B37+B28Equity value 654
Valuing the firm--using mid-year discountingWeighted average cost of capital 20%
Year 0 1 2 3 FCF 181 79 92 Terminal valueTotal 181 79 92
NPV of row 81 1,005 <-- =NPV(B76,C81:G81)*(1+B76)Add in initial (year 0) cash and mkt. securities 80Enterprise value 1,085Subtract out value of firm's debt today -320Equity value 765
765 #VALUE!Data table: Value as function 0 765
of SG&A 50 765100 765
0 100 200 300 400 500 6000
200
400
600
800
1,000
Effect of SG&A on Equity Value
SG&A
Valu
e
150 765200 765250 765300 765350 765400 765450 765500 765550 765600 765
Data table: Value as function 765 0% 3% 6%of SG&A and sales growth 0 765 765 765
50 765 765 765100 765 765 765150 765 765 765200 765 765 765250 765 765 765300 765 765 765350 765 765 765400 765 765 765450 765 765 765500 765 765 765550 765 765 765600 765 765 765
0 100 200 300 400 500 6000
200
400
600
800
1,000
Effect of SG&A on Equity Value
SG&A
Valu
e
4 5
1,464 1,611 (732) (805) (200) (200) (32) (32) 17 18 (189) (220) 329 372 (127) (144) 202 228 (76) (86) 126 129
224 231 220 242
2,031 2,364 (904) (1,124) 1,127 1,240 1,571 1,712
117 129 320 320 450 450 684 813 1,571 1,712
4 5
The model of section 3.2 includes cost of goods sold but not selling, general, and administrative (SG&A) expenses. Suppose that the firm has $200 of these expenses each year, irrespective of the level of sales. a. Change the model to accommodate this new assumption. Show the resulting profit and loss statements, balance sheets, free cash flows, and valuation. b. Create a data table in which you show the sensitivity of the equity value to the level of SG&A. Let SG&A vary from 0 to $500 per year.
202 228 189 220 (20) (22)11 12
(291) (333)19 19 (3) (3)
106 121
4 5 106 121
1,331 <-- =G59*(1+B3)/(B56-B3)106 1,452
4 5 106 121
1,191 <-- =G72*(1+B3)/(B69-B3)106 1,312
0 100 200 300 400 500 6000
200
400
600
800
1,000
Effect of SG&A on Equity Value
SG&A
Valu
e
9% 12% 15%765 765 765765 765 765765 765 765765 765 765765 765 765765 765 765765 765 765765 765 765765 765 765765 765 765765 765 765765 765 765765 765 765
0 100 200 300 400 500 6000
200
400
600
800
1,000
Effect of SG&A on Equity Value
SG&A
Valu
e
EXERCISE 3
Sales growth 10%Current assets/Sales 15%Current liabilities/Sales 8%Fixed assets at cost/Sales 100%Costs of goods sold/Sales 50%Depreciation rate 10%Interest rate on debt 10.00%Interest paid on cash & marketable securities 8.00%Tax rate 40%Dividend payout ratio 40%
Year 0 1 2Income statementSales 1,000 1,160 1,100 Costs of goods sold (500) (580) (550)Interest payments on debt (32) (32) (32)Interest earned on cash & marketable securities 6 (14) (39)Depreciation (100) (104) (105)Profit before tax 374 350 374 Taxes (150) (140) (151)Profit after tax 225 210 223 Dividends (90) (94) (99)Retained earnings 135 116 125
Balance sheetCash and marketable securities 80 (438) (525)Current assets 150 174 165 Fixed assets At cost 1,070 1,000 1,100 Depreciation (300) (404) (509) Net fixed assets 770 1,404 1,609 Total assets 1,000 1,140 1,248
Current liabilities 80 93 88 Debt 320 320 320 Stock 450 450 450 Accumulated retained earnings 150 266 390 Total liabilities and equity 1,000 1,116 1,248
Year 0 1 2 Free cash flow calculationProfit after tax 210 223 Add back depreciation 104 105 Subtract increase in current assets 0 (15)Add back increase in current liabilities 0 8 Subtract increase in fixed assets at cost 70 (100)
The model of section 3.2 includes cost of goods sold but not selling, general, and administrative (SG&A) expenses. Suppose that the firm has $200 of these expenses each year, irrespective of the level of sales. a. Change the model to accommodate this new assumption. Show the resulting profit and loss statements, balance sheets, free cash flows, and valuation. b. Create a data table in which you show the sensitivity of the equity value to the level of SG&A. Let SG&A vary from 0 to $500 per year.
Add back after-tax interest on debt 19 19 Subtract after-tax interest on cash & mkt. securities 8 21 Free cash flow 410 262
Valuing the firmWeighted average cost of capital 20%
Year 0 1 2 FCF 410 262 Terminal valueTotal 410 262
NPV of row 61 2,493 #VALUE!Add in initial (year 0) cash and mkt. securities 80Enterprise value 2,573Subtract out value of firm's debt today -320Equity value 2,253
Cash and marketable securities as negative debtNPV of row 61 = enterprise value 2,493Net year 0 debt -240 #VALUE!Equity value 2,253
Valuing the firm--using half-year discountingWeighted average cost of capital 26%
Year 0 1 2 FCF 410 262 Terminal valueTotal 410 262
NPV of row 81 3,045 #VALUE!Add in initial (year 0) cash and mkt. securities 80Enterprise value 3,125Subtract out value of firm's debt today -320Equity value 2,805
Growth 2,805 #VALUE!0% 2,8052% 2,8054% 2,8056% 2,8058% 2,805
10% 2,80512% 2,80514% 2,80516% 2,805
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%0
5001,0001,5002,0002,5003,000
Sales Growth and Equity Value
#VALUE!
WACC 2,805.27 10% 12%
0% nmf 2,805.27 growth rate of sales 2% nmf 2,805.27
4% nmf 2,805.27 6% nmf 2,805.27 8% nmf 2,805.27
10% 2,805.27 2,805.27 12% 2,805.27 2,805.27 14% 2,805.27 2,805.27 16% 2,805.27 2,805.27
3 4 5
1,210 1,331 1,464 (605) (666) (732) (32) (32) (32) (46) (54) (63) (116) (127) (140) 412 452 497 (167) (184) (203) 245 268 294 (109) (120) (132) 136 148 162
(622) (731) (851) 182 200 220
1,210 1,331 1,464 (624) (751) (891) 1,834 2,082 2,355 1,393 1,551 1,724
97 106 117 320 320 320 450 450 450 526 675 837 1,393 1,551 1,724
3 4 5
245 268 294 116 127 140 (17) (18) (20)
9 10 11 (110) (121) (133)
The model of section 3.2 includes cost of goods sold but not selling, general, and administrative (SG&A) expenses. Suppose that the firm has $200 of these expenses each year, irrespective of the level of sales. a. Change the model to accommodate this new assumption. Show the resulting profit and loss statements, balance sheets, free cash flows, and valuation. b. Create a data table in which you show the sensitivity of the equity value to the level of SG&A. Let SG&A vary from 0 to $500 per
19 19 19 25 28 32
286 313 343
3 4 5 286 313 343
3,769 #VALUE!286 313 4,111
3 4 5 286 313 343
3,880 #VALUE!286 313 4,222
0% 2% 4% 6% 8% 10% 12% 14% 16% 18%0
5001,0001,5002,0002,5003,000
Sales Growth and Equity Value
14% 16% 18% 20% 22% 24% 26% 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27 2,805.27
Sales growth 10%Current assets/Sales 15%Current liabilities/Sales 8%Costs of goods sold/Sales 50%Depreciation rate 10%Interest rate on debt 10.00%Interest paid on cash & marketable securities 8.00%Tax rate 40%Dividend payout ratio 40%
Year 0 1 2 3Income statementSales 1,000 1,100 1,210 1,331 Costs of goods sold (500) (550) (605) (666)Interest payments on debt (32) (32) (32) (32)Interest earned on cash & marketable securities 6 15 31 47 Depreciation (100) (109) (115) (126)Profit before tax 374 425 489 554 Taxes (150) (170) (196) (222)Profit after tax 224 255 293 332 Dividends (90) (102) (117) (133)Retained earnings 135 153 176 199
Balance sheetCash and marketable securities 80 304 479 688 Current assets 150 165 182 200 Fixed assets At cost 1,070 1,100 1,209 1,318 Depreciation (300) (409) (524) (650) Net fixed assets 770 692 685 668 Total assets 1,000 1,161 1,346 1,555
Current liabilities 80 88 97 106 Debt 320 320 320 320 Stock 450 450 450 450 Accumulated retained earnings 150 303 479 678 Total liabilities and equity 1,000 1,161 1,346 1,555
Year 0 1 2 3 Free cash flow calculationProfit after tax 255 293 332 Add back depreciation 109 115 126 Subtract increase in current assets (15) (17) (18)Add back increase in current liabilities 8 9 10 Subtract increase in fixed assets at cost (30) (109) (109)Add back after-tax interest on debt 19 19 19
EXERCISE 4--ASSETS AT COST GIVEN BY A STEP FUNCTION
Referring again to the model of section 3.2, suppose that the fixed assets at cost follow the following step
function:Incorporate this function into the model.
Subtract after-tax interest on cash & mkt. securities (9) (19) (28)Free cash flow 336 292 332
Valuing the firmWeighted average cost of capital 20%
Year 0 1 2 3 FCF 336 292 332 Terminal valueTotal 336 292 332
NPV of row 61 2,858 <-- =NPV(B56,C61:G61)Add in initial (year 0) cash and mkt. securities 80Enterprise value 2,938Subtract out value of firm's debt today -320Equity value 2,618
Cash and marketable securities as negative debtNPV of row 61 = enterprise value 2,858Net year 0 debt -240 <-- =-B37+B28Equity value 2,618
Valuing the firm--using half-year discountingWeighted average cost of capital 20%
Year 0 1 2 3 FCF 336 292 332 Terminal valueTotal 336 292 332
NPV of row 81 3,430 <-- =NPV(B76,C81:G81)*(1+B76)Add in initial (year 0) cash and mkt. securities 80Enterprise value 3,510Subtract out value of firm's debt today -320Equity value 3,190
4 5
1,464 1,611 (732) (805) (32) (32) 65 85 (137) (149) 627 710 (251) (284) 376 426 (151) (170) 226 255
928 1,205 220 242
1,431 1,548 #VALUE! (788) (937) 644 612 1,791 2,058
117 129 320 320 450 450 904 1,160 1,791 2,058
4 5
376 426 137 149 (20) (22)11 12
(113) (117)19 19
Referring again to the model of section 3.2, suppose that the fixed assets at cost follow the following step
function:Incorporate this function into the model.
(39) (51)372 415
4 5 372 415
4,569 <-- =G59*(1+B3)/(B56-B3)372 4,984
4 5 372 415
4,569 <-- =G72*(1+B3)/(B69-B3)372 4,984
EXERCISE 5--MODELING DIVIDENDS ON A PER-SHARE BASISSales growth 20%Current assets/Sales 20%Current liabilities/Sales 8%Net fixed assets/Sales 80%Costs of goods sold/Sales 50%Depreciation rate 10%Interest rate on debt 10.00%Interest paid on cash and marketable securities 8.00%Tax rate 40%Year 1 dividend per share 0.25Number of shares 1,200Dividend annual growth rate 16%
Year 0 1 2 3Income statementSales 1,000 1,200 1,440 1,728 Costs of goods sold (600) (720) (864)Interest payments on debt (47) (68) (98)Interest earned on cash and marketable securities 3 - - Depreciation (124) (156) (194)Profit before tax 432 496 572 Taxes (173) (198) (229)Profit after tax 259 298 343 Dividends (300) (348) (404)Retained earnings (41) (50) (61)
Balance sheetCash and marketable securities 80 - - - Current assets 200 240 288 346 Fixed assets At cost 1,100 1,384 1,732 2,157 Depreciation (300) (424) (580) (774) Net fixed assets 800 960 1,152 1,382 Total assets 1,080 1,200 1,440 1,728
Current liabilities 80 96 115 138 Debt 400 545 816 1,142 Stock 450 450 450 450 Accumulated retained earnings 150 109 59 (2)Total liabilities and equity 1,080 1,200 1,440 1,728
Year 0 1 2 3 Free cash flow calculationProfit after tax 259 298 343 Add back depreciation 124 156 194 Subtract increase in current assets (40) (48) (58)Add back increase in current liabilities 16 19 23 Subtract increase in fixed assets at cost (284) (348) (425)Add back after-tax interest on debt 28 41 59 Subtract after-tax interest on cash and mkt. securities (2) 0 0 Free cash flow 101 118 137
Part b: Table: Debt/Equity (book values) ratio as a function of dividend growth rate Year 1 Year 2 Year 3
0.975 1.604 2.5480% 0.975 1.604 2.548
Dividend growth rate 2% 0.975 1.604 2.5484% 0.975 1.604 2.5486% 0.975 1.604 2.5488% 0.975 1.604 2.548
10% 0.975 1.604 2.54812% 0.975 1.604 2.54814% 0.975 1.604 2.54816% 0.975 1.604 2.54818% 0.975 1.604 2.548
EXERCISE 5--MODELING DIVIDENDS ON A PER-SHARE BASIS
4 5
2,074 2,488 (1,037) (1,244) (134) (176) - - (242) (299) 662 769 (265) (308) 397 461 (468) (543) #VALUE! (71) (82)
- - 415 498
2,675 3,306 (1,016) (1,315) 1,659 1,991 2,074 2,488
166 199 1,531 1,994 450 450 (73) (155) 2,074 2,488
4 5
397 461 242 299 (69) (83)28 33
(518) (631)80 106
0 0 159 186
5. Consider the model in section 3.7 (where debt is the plug). a. Suppose that the firm has 1200 shares and that it decides to pay, in year 1, a dividend per share of 25 cents. In addition, suppose that it wants this dividend per share to grow in subsequent years by 16 percent per year. Incorporate these changes into the pro forma model. b. Do a sensitivity analysis in which you show the effect on the debt/equity ratio of the nnual growth rate of dividends. Vary this rate from 0 percent to 18 percent, in steps of 2 percent. For this exercise, define debt as net debt (i.e., debt minus cash and marketable securities).
Table: Debt/Equity (book values) ratio as a function of dividend growth rate Year 4 Year 5
4.064 6.764 #VALUE!4.064 6.7644.064 6.7644.064 6.7644.064 6.7644.064 6.7644.064 6.7644.064 6.7644.064 6.7644.064 6.7644.064 6.764
EXERCISE 7--TERMINAL VALUE = DEBT + EQUITY AT BOOK VALUESales growth 10%Current assets/Sales 15%Current liabilities/Sales 8%Net fixed assets/Sales 77%Costs of goods sold/Sales 50%Depreciation rate 10%Interest rate on debt 10.00%Interest paid on cash & marketable securities 8.00%Tax rate 40%Dividend payout ratio 40%
Year 0 1 2 3Income statementSales 1,000 1,100 1,210 1,331 Costs of goods sold (500) (550) (605) (666)Interest payments on debt (32) (32) (32) (32)Interest earned on cash & marketable securities 6 9 14 20 Depreciation (100) (117) (137) (161)Profit before tax 374 410 450 492 Taxes (150) (164) (180) (197)Profit after tax 225 246 270 295 Dividends (90) (98) (108) (118)Retained earnings 135 148 162 177
Balance sheetCash and marketable securities 80 144 213 289 Current assets 150 165 182 200 Fixed assets At cost 1,070 1,264 1,486 1,740 Depreciation (300) (417) (554) (715) Net fixed assets 770 847 932 1,025 Total assets 1,000 1,156 1,326 1,513
Current liabilities 80 88 97 106 Debt 320 320 320 320 Stock 450 450 450 450 Accumulated retained earnings 150 298 460 637 Total liabilities and equity 1,000 1,156 1,326 1,513
Year 0 1 2 3 Free cash flow calculationProfit after tax 246 270 295 Add back depreciation 117 137 161 Subtract increase in current assets (15) (17) (18)Add back increase in current liabilities 8 9 10 Subtract increase in fixed assets at cost (194) (222) (254)Add back after-tax interest on debt 19 19 19 Subtract after-tax interest on cash & mkt. securities (5) (9) (12)Free cash flow 176 188 201
Valuing the firm
Weighted average cost of capital 20%
Year 0 1 2 3 FCF 176 188 201 Terminal valueTotal 176 188 201
NPV of row 61 1,317 #VALUE!Add in initial (year 0) cash and mkt. securities 80Enterprise value 1,397Subtract out value of firm's debt today -320Equity value 1,077
Cash and marketable securities as negative debtNPV of row 61 = enterprise value 1,317Net year 0 debt -240 #VALUE!Equity value 1,077
Valuing the firm--using mid-year discountingWeighted average cost of capital 20%
Year 0 1 2 3 FCF 176 188 201 Terminal valueTotal 176 188 201
NPV of row 81 1,580 <-- =NPV(B76,C81:G81)*(1+B76)Add in initial (year 0) cash and mkt. securities 80Enterprise value 1,660Subtract out value of firm's debt today -320Equity value 1,340
Growth 1,340 #VALUE!0% 1,0282% 1,1004% 1,1916% 1,3068% 1,461
10% 1,67712% 2,00214% 2,54316% 3,625
#VALUE! WACC 1,340.03 10% 12% 14%
0% 2,030.04 1,696.78 1,458.43 growth rate of sales 2% 2,458.87 1,970.59 1,644.72
0% 2% 4% 6% 8% 10% 12% 14% 16%0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000 Sales Growth and Equity Value
4% 3,173.58 2,381.29 1,905.52 6% 4,603.01 3,065.80 2,296.72 8% 8,891.30 4,434.82 2,948.73
10% nmf 8,541.87 4,252.74 12% nmf nmf 8,164.77 14% nmf nmf nmf 16% nmf nmf nmf
EXERCISE 7--TERMINAL VALUE = DEBT + EQUITY AT BOOK VALUE
4 5
1,464 1,611 (732) (805) (32) (32) 26 33 (189) (220) 538 587 (215) (235) 323 352 (129) (141) 194 211
371 459 220 242
2,031 2,364 (904) (1,124) 1,127 1,240 1,718 1,941
117 129 320 320 450 450 830 1,042 1,718 1,941
4 5
323 352 189 220 (20) (22)11 12
(291) (333)19 19
(16) (20)214 228
In the valuation exercise of section 3.4, the terminal value is calculated
using a Gordon dividend model on the cash flows. Replace this terminal
value by the year-5 book value of debt plus equity. In making this change,
you are essentially assuming that the book value correctly predicts the market value.7. In the valuation
exercise of section 3.4, the terminal value is calculated using a Gordon dividend model on the cash flows. Replace this terminal value by the
year-5 book value of debt plus equity.
4 5 214 228
1,812 #VALUE!214 2,040
4 5 214 228
1,812 #VALUE!214 2,040
16% 18% 20% 22% 24% 26% 1,279.41 1,139.96 1,028.23 936.67 860.24 795.47 1,411.68 1,236.67 1,100.37 991.18 901.71 827.04
0% 2% 4% 6% 8% 10% 12% 14% 16%0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000 Sales Growth and Equity Value
1,588.03 1,361.01 1,190.54 1,057.80 951.47 864.35 1,834.92 1,526.79 1,306.48 1,141.07 1,012.28 909.13 2,205.27 1,758.89 1,461.06 1,248.14 1,088.30 963.85 2,822.51 2,107.03 1,677.48 1,390.90 1,186.04 1,032.26 4,056.99 2,687.27 2,002.10 1,590.76 1,316.36 1,120.21 7,760.42 3,847.75 2,543.14 1,890.55 1,498.80 1,237.48 nmf 7,329.19 3,625.21 2,390.21 1,772.47 1,401.65
EXERCISE 8--THE EBITDA CALCULATIONS START IN ROW 53Sales growth 10%Current assets/Sales 15%Current liabilities/Sales 8%Net fixed assets/Sales 77%Costs of goods sold/Sales 50%Depreciation rate 10%Interest rate on debt 10.00%Interest paid on cash & marketable securities 8.00%Tax rate 40%Dividend payout ratio 40%
Year 0 1 2 3Income statementSales 1,000 1,100 1,210 1,331 Costs of goods sold (500) (550) (605) (666)Interest payments on debt (32) (32) (32) (32)Interest earned on cash & marketable securities 6 9 14 20 Depreciation (100) (117) (137) (161)Profit before tax 374 410 450 492 Taxes (150) (164) (180) (197)Profit after tax 225 246 270 295 Dividends (90) (98) (108) (118)Retained earnings 135 148 162 177
Balance sheetCash and marketable securities 80 144 213 289 Current assets 150 165 182 200 Fixed assets At cost 1,070 1,264 1,486 1,740 Depreciation (300) (417) (554) (715) Net fixed assets 770 847 932 1,025 Total assets 1,000 1,156 1,326 1,513
Current liabilities 80 88 97 106 Debt 320 320 320 320 Stock 450 450 450 450 Accumulated retained earnings 150 298 460 637 Total liabilities and equity 1,000 1,156 1,326 1,513
Year 0 1 2 3 Free cash flow calculationProfit after tax 246 270 295 Add back depreciation 117 137 161 Subtract increase in current assets (15) (17) (18)Add back increase in current liabilities 8 9 10 Subtract increase in fixed assets at cost (194) (222) (254)Add back after-tax interest on debt 19 19 19 Subtract after-tax interest on cash & mkt. securities (5) (9) (12)Free cash flow 176 188 201
EBITDA CalculationProfit before taxes 410 450 492
Add back depreciation 117 137 161 Add back net interest 23 18 12 EBITDA 550 605 666
Valuing the firmWeighted average cost of capital 20%EBITDA multiple for terminal value 6
Year 0 1 2 3 FCF 176 188 201 Terminal valueTotal 176 188 201
NPV of row 68 2,530 #VALUE!Add in initial (year 0) cash and mkt. securities 80Enterprise value 2,610Subtract out value of firm's debt today -320Equity value 2,290
Cash and marketable securities as negative debtNPV of row 61 = enterprise value 2,530Net year 0 debt -240 #VALUE!Equity value 2,290
Valuing the firm--using half-year discountingWeighted average cost of capital (WACC) 20%EBITDA multiple for terminal value 6
Year 0 1 2 3 FCF 176 188 201 Terminal valueTotal 176 188 201
NPV of row 89 3,036 #VALUE!Add in initial (year 0) cash and mkt. securities 80Enterprise value 3,116Subtract out value of firm's debt today -320Equity value 2,796
growth 2,796 #VALUE!6 2,7967 3,1858 3,5739 3,961
10 4,35011 4,73812 5,12613 5,51514 5,903
6 7 8 9 10 11 12 13 140
2,000
4,000
6,000
8,000
EBITDA Multiple and Equity Value
#VALUE!
WACC2,796 10% 12% 14%
Data table of equity value as function of 6 3,890 3,632 3,396 EBITDA Multiple 7 4,440 4,144 3,873
8 4,990 4,656 4,350 9 5,540 5,167 4,826
10 6,090 5,679 5,303 11 6,640 6,191 5,780 12 7,190 6,703 6,257 13 7,740 7,214 6,733 14 8,290 7,726 7,210
6 7 8 9 10 11 12 13 140
2,000
4,000
6,000
8,000
EBITDA Multiple and Equity Value
EXERCISE 8--THE EBITDA CALCULATIONS START IN ROW 53
4 5
1,464 1,611 (732) (805) (32) (32) 26 33 (189) (220) 538 587 (215) (235) 323 352 (129) (141) 194 211
371 459 220 242
2,031 2,364 (904) (1,124) 1,127 1,240 1,718 1,941
117 129 320 320 450 450 830 1,042 1,718 1,941
4 5
323 352 189 220 (20) (22)11 12
(291) (333)19 19
(16) (20)214 228
538 587
8. Repeat exercise 7, but this time replace the terminal value by an EBITDA ratio times year-5 anticipatedEBITDA. Show a graph of the equity value of the firm as a function of the assumed year-5 EBITDA ratio,varying this ratio from 6 to 14.
189 220 6 (1) 732 805
4 5 214 228
4,832 #VALUE!214 5,060
4 5 214 228
4,832 #VALUE!214 5,060
6 7 8 9 10 11 12 13 140
2,000
4,000
6,000
8,000
EBITDA Multiple and Equity Value
16% 18% 20% 22% 24% 26%3,179 2,980 2,796 2,627 2,471 2,326 3,624 3,395 3,185 2,991 2,811 2,646 4,069 3,811 3,573 3,354 3,152 2,965 4,513 4,226 3,961 3,718 3,493 3,285 4,958 4,641 4,350 4,081 3,833 3,604 5,403 5,057 4,738 4,445 4,174 3,924 5,848 5,472 5,126 4,808 4,515 4,243 6,292 5,887 5,515 5,172 4,855 4,563 6,737 6,303 5,903 5,535 5,196 4,882
6 7 8 9 10 11 12 13 140
2,000
4,000
6,000
8,000
EBITDA Multiple and Equity Value
EXERCISE 9 PROJECT FINANCESales growth 15%Current assets/Sales 15%Current liabilities/Sales 8%Costs of goods sold/Sales 55%Depreciation rate 10%Interest rate on debt 10.00%Interest paid on cash & marketable securities 8.00%Tax rate 40%Dividend payout ratio 0% <-- No dividends until all the debt is paid off
entered into the balance sheet and the interest is put into the profit and loss statement.Principal Debt Of which:at begin. payment
Year of year at end yr. Interest1 Err:523 52.76 Err:5232 167.24 52.76 16.72 3 131.21 52.76 13.12 4 91.57 52.76 9.16 5 47.96 Err:523 4.80
Year 0 1 2 3Income statementSales 1,150 1,323 1,521 Costs of goods sold (633) (727) (836)Interest payments on debt Err:523 Err:523 Err:523Interest earned on cash & marketable securities Err:522 Err:522 Err:523Depreciation (211) (233) (257)Profit before tax Err:523 Err:523 Err:523Taxes Err:523 Err:523 Err:523Profit after tax Err:523 Err:523 Err:523Dividends Err:523 Err:523 Err:523Retained earnings Err:523 Err:523 Err:523
Balance sheetCash and marketable securities - Err:522 Err:523 Err:523Current assets 200 173 198 228 Fixed assets At cost 2,000 2,211 2,443 2,700 Depreciation - (211) (443) (700) Net fixed assets 2,000 2,000 2,000 2,000 Total assets 2,200 Err:522 Err:523 Err:523
Current liabilities 100 92 106 122 Debt Err:523 Err:523 Err:523 Err:523Stock 1,100 1,100 1,100 1,100 Accumulated retained earnings - Err:523 Err:523 Err:523Total liabilities and equity Err:523 Err:522 Err:523 Err:523
FREE CASH FLOW CALCULATIONYear 0 1 2 3
Debt repayment table (essentially a loan table from Chapter 1): The principal amounts are
the plug: =C39-C28-C32
=B31-$B$7*(C30+B30)/2
Profit after tax Err:523 Err:523 Err:523Add back depreciation 211 233 257 Subtract increase in current assets 28 (26) (30)Add back increase in current liabilities (8) 14 16 Subtract increase in fixed assets at cost (211) (233) (257)Add back after-tax interest on debt Err:523 Err:523 Err:523Subtract after-tax interest on cash & mkt. securities Err:522 Err:522 Err:523Free cash flow Err:523 Err:523 Err:523
RETURN ON EQUITY (ROE)Year 0 1 2 3 Equity cash flow -1,100 Err:523 Err:523 Err:523RETURN ON EQUITY (ROE) Err:523 #VALUE!
Data table: ROE as a function of initial Err:523 #VALUE!equity investment 2,000 Err:523
1,800 Err:5231,600 Err:5231,400 Err:5231,200 Err:5231,000 Err:523
800 Err:523
600 Err:523400 Err:523200 Err:523
Note that the cash flow generated by depreciation equals the increase in fixed assets at cost.
020
040
060
080
01,0
001,2
001,4
001,6
001,8
002,0
000%
200%
400%
600%
800%
1000%
1200% ROE as a Function of Initial Equity Investment
Equity investment
RO
E
<-- No dividends until all the debt is paid off
Repaidprincipal 32.76 36.04 39.64 43.60
Err:523
4 5
1,749 2,011 (962) (1,106)
Err:523 Err:523 #VALUE!Err:523 Err:523
(284) (314)Err:523 Err:523Err:523 Err:523Err:523 Err:523Err:523 Err:523Err:523 Err:523
Err:523 Err:523 262 302
2,985 3,299 (985) (1,299) 2,000 2,000
Err:523 Err:523
140 161 Err:523 Err:523 #VALUE!
1,100 1,100 Err:523 Err:523Err:523 Err:523
4 5
In the project finance pro forma of section 3.9 it is assumed that the firm pays off its initial debt of 1,000 in equal installments of principal over five years. Change this assumption and assume instead that the firm pays off its debt in equal payments of interest and principal over five years.
Err:523 Err:523284 314 (34) (39)18 21
(284) (314)Err:523 Err:523Err:523 Err:523Err:523 Err:523
4 5 Err:523 Err:523 #VALUE!
020
040
060
080
01,0
001,2
001,4
001,6
001,8
002,0
000%
200%
400%
600%
800%
1000%
1200% ROE as a Function of Initial Equity Investment
Equity investment
RO
E
Sales growth 15%Current assets/Sales 15%Current liabilities/Sales 8%Costs of goods sold/Sales 55%Depreciation rate 10%Interest rate on debt 10.00%Interest paid on cash & marketable securities 8.00%Tax rate 40%Dividend payout ratio 0% <-- No dividends until all the debt is paid off
Year 0 1 2 3Income statementSales 1,150 1,323 1,521 Costs of goods sold (633) (727) (836)Interest payments on debt (100) (84) (66)Interest earned on cash & marketable securities 36 73 76 Depreciation (211) (233) (257)Profit before tax 243 352 438 Taxes (97) (139) (172)Profit after tax 146 213 266 Dividends - - - Retained earnings 146 213 266
Balance sheetCash and marketable securities - 902 922 976 Current assets 200 173 198 228 Fixed assets At cost 2,000 2,211 2,443 2,700 Depreciation - (211) (443) (700) Net fixed assets 2,000 2,000 2,000 2,000 Total assets 2,200 3,074 3,121 3,204
Current liabilities 100 92 106 122 Debt 1,000 836 656 458 Stock 1,100 200 2,000 2,000 Accumulated retained earnings - 146 359 624 Total liabilities and equity 2,200 3,074 3,121 3,204
FREE CASH FLOW CALCULATIONYear 0 1 2 3 Profit after tax 146 213 266 Add back depreciation 211 233 257 Subtract increase in current assets 28 (26) (30)Add back increase in current liabilities (8) 14 16 Subtract increase in fixed assets at cost (211) (233) (257)Add back after-tax interest on debt 100 84 66 Subtract after-tax interest on cash & mkt. securities (36) (73) (76)Free cash flow 230 211 241
EXERCISE 10 PROJECT FINANCEUses functions IPMT and PPMT
the plug: =C39-C28-C32
=B31-$B$7*(C30+B30)/2
Note that the cash flow generated by depreciation equals the increase in fixed assets at cost.
RETURN ON EQUITY (ROE)Year 0 1 2 3 Equity cash flow -200 - - - RETURN ON EQUITY (ROE) 10.89% #VALUE!
Data table: ROE as a function of initial 10.89% #VALUE!equity investment 2,000 10.89%
1,800 10.89%1,600 10.89%1,400 10.89%1,200 10.89%1,000 10.89%
800 10.89%
600 10.89%400 10.89%200 10.89%
Note that the cash flow generated by depreciation equals the increase in fixed assets at cost.
020
040
060
080
01,0
001,2
001,4
001,6
001,8
002,0
000%2%4%6%8%
10%12% ROE as a Function of Initial
Equity Investment
Equity investment
ROE
<-- No dividends until all the debt is paid off
4 5
1,749 2,011 (962) (1,106) (46) (24) #VALUE! 82 91 (284) (314) 539 658 (211) (257) 328 402 - - 328 402
1,070 1,213 262 302
2,985 3,299 (985) (1,299) 2,000 2,000 3,332 3,515
140 161 240 - #VALUE! 2,000 2,000 952 1,354 3,332 3,515
4 5 328 402 284 314 (34) (39)18 21
(284) (314)46 24
(82) (91)276 316
In the project finance pro forma of section 3.9 it is assumed that the firm pays off its initial debt of 1,000 in equal installments of principal over five years. Change this assumption and assume instead that the firm pays off its debt in equal payments of interest and principal over five years. Hint: You have to use the PMT function to find the annual payments; then set up a loan table (as in Chapter 1) to split the annual payments into an interest and repayment of principal.
4 5 - 3,354 #VALUE!
020
040
060
080
01,0
001,2
001,4
001,6
001,8
002,0
000%2%4%6%8%
10%12% ROE as a Function of Initial
Equity Investment
Equity investment
ROE