Questions

Assume that 1% of sales is needed as cash, and that the firm's wacc is 20% in perpetuity.
1. What is the NOPLAT in 2009?
2. What is the Invested Capital (IC) in 2009?
3. What is the return on invested capital (ROIC) in 2009?
4. What is the free cash flow (FCF) in 2009?
5. If 2009 ROIC remains unchanged and NOPLAT in 2010 is expected to be as in 2009 and to grow 5% per year in
perpetuity, what is the continuation value of the firm at the end of 2009?(include only the operating part.)

Given: exhibits 1 and 2.

Solutions are in the following
exhibits.

Exhibit 1: Historical Income Statements ($MM)

2008 2009
Sales 1,000 1,200
Costs 500 600
Depreciation 200 250
Operating Income (before
Interest and Taxes) 300 350
Interest Expense 100 110
Nonoperating Income
(expense) 20 25
Special Items - 30
Pretax Income 220 295
Income Taxes* 58 88
Net Income 162 207
A. tax rate 0.26 0.30

* TAX TABLE: Pretax Income Tax Rate

0 --100 20%
101 -- 200 30%
>200 40%
Exhibit 2: Historical Balance Sheet ($MM)

2008 2009
Cash and Short-term
Investments 2,100 2,400
cash 1,100 1,200
Short-term Investments 1,000 1,200
Receivables (Trade) 250 400
Inventories 200 150
Current Assets 2,550 2,950
Net Fixed Assets 2,000 2,100
Total Assts 4,550 5,050

Notes Payable 400 420

Debt Due in One Year 200 100
Accounts Payable 100 130
Income taxes Payable 50 70
Current Liabilities 750 720
Long-Term Debt 100 120
Total Liabilities 850 840
Common Stock 200 250
Capital Surplus 500 700
Retained Earnings 3,000 3,260
Shareholder's Equity 3,700 4,210
Total 4,550 5,050
Answer 1

Exhibit 3: NOPLAT ( $MM)

2008 2009
Sales 1,000 1,200
Costs 500 600
Depreciation 200 250
Operating Income Before Interest Taxes
and Amortization (EBITA) 300 350
Taxes on EBITA 90 110
NOPLAT 210 240

Taxes on EBITA
Income Taxes 58 88
Tax Shield on Interest Expense 40 44
Taxes on Special Items - (12)
Taxes on non-operaing income (8) (10)
Taxes on Operating Income 90 110

Extra:
NOPLAT/sales 0.18 0.20
Answer 2

Exhibit 4: Historical Invested Capital ($MM)

2008 2009
Total Current Assets 2,550 2,950
Minus cash and Short-Term
Investments (2,100) (2,400)
Minus Noninterst Bearing Current
Liabilities (150) (200)
Add allocation for cash (1% of
sales) 10 12
Operating Net Working Capital 310 362
Net Fixed Assets 2,000 2,100
Operating Invested Capital (IC) 2,310 2,462

Extra:
Change in IC 152
Inestment in Excess of Depr. 152
Invested Capital/sales 2.31 2.05
Inv. In Excess of Depr./NOPLAT 0.633

Answer 3

ROIC a 0.10
Answer 4

Exhibit 5: 2009 Cash Flows ($MM)

2009
NOPLAT 240
Depreciation 250
Gross Operating Cash Flow 490

Increses in NWC 52
Net Capital Spending 350
Gross Investment (Capex) 402
Free Cash Flow 88

NOPLAT 240
Investment in excess of depr. 152
FCF 88

Answer 5

The reinvestment rate is b=g/z: b= 0.48125

The valuation formula for the end of yesr 2009

is CV2009 =NOPLAT2010*(1-b)/(wacc-g) CV2009 = $830.000 MM