F402/560

Assignment 3a
Spring 2014
NAMES:
INSTRUCTIONS:
Write the names of everyone on the team for this assignment in the spaces above.
Compute the answers to the questions and place your answers in the red-outlined
answer boxes which are provided for each question.
For the multiple choice questions, place a border around the letter of your answer,
like this. (Your border does not have to be red; use any color you want.)
B.
Please do NOT insert or delete columns in the spreadsheet. And please do NOT
change any column widths.
For the calculations on the VF Corp. financial statements, please show all your
work and calculations on that second worksheet.
Keep all the calculations for each year in the same column.
Round dollar amounts to whole dollars unless otherwise stated.
Be sure to put the correct sign on all cash flows: Income, cash inflows and values being
added get a positive sign; expenses, cash outflows and values being subtracted get a
negative sign.
When you have finished, then email your completed spreadsheet, as an attachment, to the
course email address. Only one upload per team.
The course email address is:
F402ksbi@gmail.com
INSTRUCTIONS, continued:
You may use the blank space to the right of the questions on this sheet to make calculations
if you wish. You may use a hand calculator, if you must, but please try to use Excel for
all these calculations.
There are a total of 11 questions. Make sure you find and answer all 11 questions,
and make all the calculations required on the VFC worksheet.
Scoring is as follows.
Questions 1 10 are worth 3 points each.
Question 11, the VF spreadsheet, is worth 30 points.
Total points possible = 60. (Your score on this assignment will be converted to a percent.)
QUESTIONS
1. Use the following information to estimate the overall average cost of debt at this firm.
Show your answer as a percent with two decimal places.
INCOME STATEMENT
Sales 120,000 Debt 16000
Operating costs (99,000) Equity 13000
Interest expense (1,240) Value 29000
Income before tax 19,760
Provision for tax (6,916) Weights
Net income 12,844 D/V 0.55172414
E/V 0.44827586
BALANCE SHEET
Cash 2,000
Operating assets 50,000
Total assets 52,000
Accounts payable 15,000
Notes payable 4,000
Long-term debt 16,000
Deferred taxes 4,000
Shareholders' equity 13,000
Total liabilities & equity 52,000
Answer:
2. Suppose the ROIC for a company, before the adjustment for operating leases, is 19%, on
invested capital (before the adjustment for operating leases) of $450,000. The present value
of operating leases was $190,000, both at the beginning of the year and at the end of the
year (same for both). What will be the ROIC after the adjustment for operating leases?
Assume the company's cost of debt is 5%.
Show your answer as a percent with two decimal places.
Answer:
3. If the market risk premium is 6%, what is the cost of equity, according to the CAPM, for a
firm with a beta of 0.88? Assume the risk-free rate is 3.5%.
Show your answer as a percent with two decimal places.
Answer:
4. The market risk premium is also called the equity risk premium (ERP). It is the difference
between the returns on the stock market and the return on government bonds (assumed to
be a risk-free rate). For years, many analysts have assumed the market risk premium (or
ERP) is approximately 6%. So when the risk-free rate is 3%, the expected return in the
equity markets should be about 9%. When the risk-free rate is 5%, the expected average
return on stocks should be about 11%.
Recent research has called into question that 6% figure. A recent article in The Economist
described recent research which put the ERP closer to 5.2% in the United States. A link to
that Economist article is provided on the course website for Assignment 3.
Read the article and answer questions 5 through 7.
5. The research depicted in Chart 1 shows that the return on American equities for the 12-year
period 2000-2011 was approximately what percent?
A. 4.0%
B. 6.0%
C. 0.0%
D. -5.4%
E. -7.6%
6. According to the article, when share valuations are high, future returns are likely to be:
A. high
B. low
C. volatile
D. stable
E. zero
7. Given the present state of dividend yields and expected dividend growth, one researcher has
predicted a future real rate of return on equities in the U.S. of 4%. That still implies an
equity risk premium of at least 4%, since:
A. most investors still expect a risk premium of at least 4%.
B. equities have become less risky over time.
C. real returns on most government debt are now zero or negative.
D. government debt is no longer risk-free.
E. many pension funds expect an 8% rate of return.
8. Selected balance sheet values from a company are shown below. The company's cost of debt
is 5.7%. Its stock price is $14 per share, with a beta of 1.2. There are 75,000 shares
outstanding. Assuming a risk-free rate of 4%, calculate the company's WACC according to
the procedure to be used in F402/F560.
Accounts payable 26,000
Short-term debt 93,000
Long-term debt 375,000
Deferred taxes 9,000
Shareholders' equity 620,000
Answer:
9. Shown below are the levered betas for five companies, and their debt-to-equity ratios. Given
this information, what would you say is the required rate of return for industry risk in this
industry? That is, if an average company in this industry has no debt, what should be its cost
of capital? Using the procedure given in class, compute your best estimate of the required
rate of return purely for industry risk in this industry. That is, find the median unlevered
beta, and then compute the CAPM assuming a risk-free rate of 3.5%.
Company Name D/E Beta
BorgWarner Inc. 10.46% 1.42
Dana Holding Corporation 62.60% 2.31
Lear Corp. 20.86% 1.24
TRW Automotive Holdings Corp. 25.60% 2.13
Visteon Corporation 23.90% 1.46
Show your answer as a percent with two decimal places.
Answer:
10. Use the technique described in class to fill in the blank cells and balance the balance sheet
shown below. Your balance sheet must continue to balance, even if I change the amount of
PP&E or the amount of net income.
2011 2012
Cash & mktbl securities 400
Accounts receivable 2,400 2,500
Inventory 5,200 5,400
Total current assets 8,000
PP&E 8,800 9,100
Deferred taxes 500 500
Other assets 900 1,200
Total assets 18,200
Accounts payable 2,200 2,310
Accrued expenses 1,100 1,100
Short-term debt 1,700
Total current liabilities 5,000
Long-term debt 2,000 1,900
Deferred taxes 600 600
Other liabilities 1,400 900
Shareholders' equity 9,200
Total liabilities & equity 18,200
Sales revenue 20,000 21,000
Net income 1,500 1,650
Dividends 400 420
11. Historical data for VF Corp. are shown on the next worksheet in this file. For this
assignment, add two sets of calculations to this spreadsheet.
First, compute an estimated cost of capital. To do this, you should research in appropriate
places to determine a cost of debt and a cost of equity. Then compute the WACC. To
determine these items, be sure to do the following:
Show several data points to support your estimated cost of debt and your
estimated beta. These data points could be, for example, numbers for
comparable companies.
In a column to the right of, and close to, your numbers, note the sources
for the major pieces of data you have used to make your estimates. Type
a short phrase into a cell in that column, on the same line as the number,
to provide the source for that number.
Show an estimate of the levered beta for VF. Go through the process we
did in class, to use betas from VF and from other similar companies in
order to find a median unlevered beta. Then lever that median back up
using VF's debt-to-equity ratio. Use this estimated levered beta as one of
your data points to estimate a beta for VF.
Show clearly how you calculated the weighted average cost of capital.
Second, for each year, calculate the appropriate ratios for all relevant accounts on the income
statement and the balance sheet. These ratios could be percents of sales, or percents of
some other appropriate base.
Format these ratios as decimal fractions with two decimal places.
In a column to the right of, and close to, your numbers, note the base for
your ratio: Percent of sales, or percent of debt, or percent of assets, or
whatever you used.
Include the ratios for the present values of the operating leases and for
dividends as a percent of sales.
Show these ratios in the same form as the income statement and balance
sheet, just like the examples which we looked at in class and which are
posted on the course website.
You do not need to compute ratios for accounts which will not be forecast.
Don't forget to recompute the present values of the operating leases
by using a cell reference to your new cost of debt.
Be sure to put the correct sign on all cash flows: Income, cash inflows and values being
When you have finished, then email your completed spreadsheet, as an attachment, to the
You may use the blank space to the right of the questions on this sheet to make calculations
Total points possible = 60. (Your score on this assignment will be converted to a percent.)
Suppose the ROIC for a company, before the adjustment for operating leases, is 19%, on
invested capital (before the adjustment for operating leases) of $450,000. The present value
of operating leases was $190,000, both at the beginning of the year and at the end of the
If the market risk premium is 6%, what is the cost of equity, according to the CAPM, for a
The market risk premium is also called the equity risk premium (ERP). It is the difference
between the returns on the stock market and the return on government bonds (assumed to
be a risk-free rate). For years, many analysts have assumed the market risk premium (or
ERP) is approximately 6%. So when the risk-free rate is 3%, the expected return in the
equity markets should be about 9%. When the risk-free rate is 5%, the expected average
Recent research has called into question that 6% figure. A recent article in The Economist
described recent research which put the ERP closer to 5.2% in the United States. A link to
The research depicted in Chart 1 shows that the return on American equities for the 12-year
According to the article, when share valuations are high, future returns are likely to be:
Given the present state of dividend yields and expected dividend growth, one researcher has
Selected balance sheet values from a company are shown below. The company's cost of debt
outstanding. Assuming a risk-free rate of 4%, calculate the company's WACC according to
Shown below are the levered betas for five companies, and their debt-to-equity ratios. Given
this information, what would you say is the required rate of return for industry risk in this
industry? That is, if an average company in this industry has no debt, what should be its cost
of capital? Using the procedure given in class, compute your best estimate of the required
rate of return purely for industry risk in this industry. That is, find the median unlevered
Use the technique described in class to fill in the blank cells and balance the balance sheet
shown below. Your balance sheet must continue to balance, even if I change the amount of
First, compute an estimated cost of capital. To do this, you should research in appropriate
Second, for each year, calculate the appropriate ratios for all relevant accounts on the income
statement and the balance sheet. These ratios could be percents of sales, or percents of
VF CORPORATION
Consolidated Balance Sheets
December 2008 2009
In thousands
ASSETS
Current assets
Cash and equivalents 381,844 731,549
Accounts receivable 851,282 776,140
Inventories 1,151,895 958,639
Deferred income taxes 96,339 64,959
Other current assets 171,650 101,275
Total current assets 2,653,010 2,632,562
Property, plant and equipment 642,727 614,178
Intangible assets 1,366,222 1,535,121
Goodwill 1,313,798 1,367,680
Other assets 458,111 324,322
Total assets 6,433,868 6,473,863
LIABILITIES AND STOCKHOLDERS EQUITY
Current liabilities
Short-term borrowings 53,580 45,453
Current portion of long-term debt 3,322 203,179
Accounts payable 435,381 373,186
Accrued liabilities 519,899 473,971
Total current liabilities 1,012,182 1,095,789
Long-term debt 1,141,546 938,494
Other liabilities 722,895 626,295
Commitments and contingencies
Stockholders equity:
Preferred Stock, no shares outstanding 0 0
Common Stock 109,848 110,285
Additional paid-in capital 1,749,464 1,864,499
Accumulated other compr income (loss) (276,294) (209,742)
Retained earnings 1,972,874 2,050,109
Total equity attributable to VF Corporation 3,555,892 3,815,151
Noncontrolling interests 1,353 (1,866)
Total stockholders equity 3,557,245 3,813,285
Total liabilities and stockholders equity 6,433,868 6,473,863
VF CORPORATION
Consolidated Statements of Income
Year Ended December 2008 2009
In thousands
Net sales 7,561,621 7,143,074
Royalty income 80,979 77,212
Total revenues 7,642,600 7,220,286
Costs and operating expenses
Cost of goods sold (4,283,680) (4,025,122)
Marketing, administrative and general expenses (2,419,925) (2,336,394)
Impairment of goodwill and intangible assets 0 (121,953)
Total costs and operating expenses (6,703,605) (6,483,469)
Operating income 938,995 736,817
Interest income 6,115 2,230
Interest expense (94,050) (85,902)
Other income (expense), net (2,969) 1,528
Income before income taxes 848,091 654,673
Income taxes (245,244) (196,215)
Net income 602,847 458,458
Net (income) loss attrib to noncon interests (99) 2,813
Net income attributable to VF Corporation 602,748 461,271
Dividends paid 255,235 261,682
Invested Capital, operating approach
Accounts receivable 851,282 776,140
Inventories 1,151,895 958,639
Other current assets 171,650 101,275
Property, plant and equipment 642,727 614,178
Intangible assets 1,366,222 1,535,121
Goodwill 1,313,798 1,367,680
Other assets 458,111 324,322
Accounts payable (435,381) (373,186)
Accrued liabilities (519,899) (473,971)
Other liabilities (722,895) (626,295)
Total invested capital 4,277,510 4,203,903
Invested Capital, financing approach
Short-term borrowings 53,580 45,453
Current portion of long-term debt 3,322 203,179
Long-term debt 1,141,546 938,494
Total stockholders equity 3,557,245 3,813,285
Cash and equivalents (381,844) (731,549)
Deferred income taxes (96,339) (64,959)
Total invested capital 4,277,510 4,203,903
NOPAT, operating approach
Operating income 736,817
Income taxes (196,215)
Reverse tax effects of nonoperating items:
Interest income 892
Interest expense (34,361)
Other income (expense), net 611
Change in deferred taxes 31,380
NOPAT 539,124
NOPAT, financing approach
Net income attributable to VF Corporation 461,271
Reverse nonoperating items, after tax:
Net (income) loss attrib to noncon interests (2,813)
Interest income (1,338)
Interest expense 51,541
Other income (expense), net (917)
Change in deferred taxes 31,380
NOPAT 539,124
Preliminary assumptions:
Cost of debt 5%
Weighted average cost of capital (WACC) 8%
Adjustments for Operating Leases
Year Ended December 2008 2009
Future noncancelable lease payments:
First year 170,300 179,700
Second year 148,500 159,400
Third year 127,600 131,200
Fourth year 98,700 107,100
Fifth year 84,400 95,200
Thereafter 214,700 226,400
Present value at cost of debt 714,653 760,705
Implied interest at cost of debt 35,733 38,035
Invested capital, unadjusted for leases 4,277,510 4,203,903
Add present value of operating leases 714,653 760,705
Adjusted invested capital 4,992,163 4,964,608
NOPAT, unadjusted for leases 539,124
Add implied interest after tax 22,821
Adjusted NOPAT 561,946
Historical performance measures
Year Ended December 2008 2009
NOPAT, adjusted for operating leases 561,946
Invested capital, adjusted for oper leases 4,992,163 4,964,608
ROIC 11.3%
FCF 589,500
EVA (NOPAT - capital charge) 162,573
EVA (Beginning capital x spread) 162,573
Operating profit margin (NOPAT as % of sales revenue) 7.8%
Asset intensity (Beginning invested cap as % of sales rev) 69.1%
ROIC = Operating margin x (1 / asset intensity) 11.3%
Investment rate (IR) = Increase in capital / NOPAT -4.9%
Sales growth rate -5.5%
g = Growth rate in invested capital -0.6%
g = ROIC x IR -0.6%
2010 2011 2012
792,239 341,228 597,461
773,083 1,120,246 1,222,345
1,070,694 1,453,645 1,354,158
68,220 106,717 140,515
121,824 166,108 135,104
2,826,060 3,187,944 3,449,583
602,908 737,451 828,218
1,490,925 2,958,463 2,917,058 Treat this as an operating item.
1,166,638 2,023,460 2,009,757 Treat this as an operating item.
371,025 405,808 428,405
6,457,556 9,313,126 9,633,021
36,576 281,686 12,559
2,737 2,744 402,873
510,998 637,116 562,638
559,164 744,486 754,142
1,109,475 1,666,032 1,732,212
935,882 1,831,781 1,429,166
550,880 1,290,138 1,346,018
0 0 0
107,938 110,557 110,205
2,081,367 2,316,107 2,527,868
(268,594) (421,477) (453,895)
1,940,508 2,520,804 2,941,447
3,861,219 4,525,991 5,125,625
100 (816) 0
3,861,319 4,525,175 5,125,625
6,457,556 9,313,126 9,633,021
2010 2011 2012
7,624,599 9,365,477 10,766,020
77,990 93,755 113,835
7,702,589 9,459,232 10,879,855
(4,105,201) (5,128,602) (5,817,880)
(2,574,790) (3,085,839) (3,596,708)
(201,738) 0 0 Treat this as an operating item.
(6,881,729) (8,214,441) (9,414,588)
820,860 1,244,791 1,465,267
2,336 4,778 3,353
(77,738) (77,578) (93,605)
4,754 (7,248) 46,860
750,212 1,164,743 1,421,875
(176,700) (274,350) (335,737)
573,512 890,393 1,086,138
(2,150) (2,304) (139) Treat this as a financial item.
571,362 888,089 1,085,999
264,281 285,722 333,229
773,083 1,120,246 1,222,345
1,070,694 1,453,645 1,354,158
121,824 166,108 135,104
602,908 737,451 828,218
1,490,925 2,958,463 2,917,058
1,166,638 2,023,460 2,009,757
371,025 405,808 428,405
(510,998) (637,116) (562,638)
(559,164) (744,486) (754,142)
(550,880) (1,290,138) (1,346,018)
3,976,055 6,193,441 6,232,247
36,576 281,686 12,559
2,737 2,744 402,873
935,882 1,831,781 1,429,166
3,861,319 4,525,175 5,125,625
(792,239) (341,228) (597,461)
(68,220) (106,717) (140,515)
3,976,055 6,193,441 6,232,247
820,860 1,244,791 1,465,267
(176,700) (274,350) (335,737)
934 1,911 1,341
(31,095) (31,031) (37,442)
1,902 (2,899) 18,744
(3,261) (38,497) (33,798)
612,640 899,925 1,078,375
571,362 888,089 1,085,999
2,150 2,304 139
(1,402) (2,867) (2,012)
46,643 46,547 56,163
(2,852) 4,349 (28,116)
(3,261) (38,497) (33,798)
612,640 899,925 1,078,375
2010 2011 2012
188,200 274,900 298,000
157,300 220,100 256,200
130,700 181,700 213,500
109,100 154,400 164,400
94,500 116,400 136,400
215,000 254,300 277,900
759,054 1,026,396 1,150,118
37,953 51,320 57,506
3,976,055 6,193,441 6,232,247
759,054 1,026,396 1,150,118
4,735,109 7,219,837 7,382,365
612,640 899,925 1,078,375
22,772 30,792 34,504
635,411 930,717 1,112,879
2010 2011 2012
635,411 930,717 1,112,879
4,735,109 7,219,837 7,382,365
12.8% 19.7% 15.4%
864,911 (1,554,012) 950,351
238,243 551,908 535,292
238,243 551,908 535,292
8.2% 9.8% 10.2%
64.5% 50.1% 66.4%
12.8% 19.7% 15.4%
-36.1% 267.0% 14.6%
6.7% 22.8% 15.0%
-4.6% 52.5% 2.3%
-4.6% 52.5% 2.3%