Question

(ALL WORK MUST BE DONE ON EXCEL)

Build a financial model on the following template. Assume that the WACC is 20%. Also assume the debt and equity remain the same. The FCF long-term growth rate is the same as the sales growth rate. ( Copy the table into Excel.)

Sales growth	10%
Current assets/sales	15%
Current liabilities/Sales	8%
Net fixed assets/sales	77%
cost of goods sold/sales	50%
depreciation rate	10%
interest rate on debt	10%
interest paid on cash and marketable securities	8%
tax rate	40%
dividend payout ratio	40%
Year	0	1	2	3	4	5
income statement
sales	1000
cost of goods sold	500
interest payment on debt	32
interest earned on cash and marketable securities	6
depreciation	100
profits before tax	374
taxes	150
profits after tax	225
dividends	90
retained earnings	135
Balance sheet
cash and marketable securities	80
current assets	150
fixed assets
At cost	1070
depreciation	300
Net fixed assets	770
total assets	1000
current liabilities	80
debt	320
stock	450
accumulated retained earnings	150
total liabilities + Equity	1000

a. Value the company’s equity. (SHOW YOUR WORK ON EXCEL)

b. The model in Part A 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. Change the model to accommodate this new assumption. Show the resulting income statements, balance sheets, the free cash flows (FCF), and the valuation. (SHOW YOUR WORK ON EXCEL)

c. Build 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 per year to $600 per year. (SHOW YOUR WORK ON EXCEL)

d. Back to Part A. Suppose that the fixed assets at cost follow the following step function:

Incorporate this function into the model and solve for the market value of equity. (SHOW YOUR WORK ON EXCEL)

e. Back to Part A again. Make two changes in the model: 1). Let debt be the plug and keep cash constant at its year-0 level. 2). Suppose that the firm has 1,000 shares and that it decides to pay, in year 1, a dividend per share of $0.15. In addition, suppose that it wants this dividend per share to growth in subsequent years by 12% per year. Incorporate these changes into the pro forma model and solve this model to get the market value of equity per share. (SHOW YOUR WORK ON EXCEL)