After reviewing the five-year financial forecast, Ms. Lender of the Commercial B
ID: 2413941 • Letter: A
Question
After reviewing the five-year financial forecast, Ms. Lender of the Commercial Bank makes several suggestions for Johnson.
Use your completed worksheet to analyze the following independent scenarios suggested by Ms. Lender. Assume long-term debt is incurred at the beginning of a year. Write a report to analysis and conclusions for each of the following scenarios.
a. Cut growth. By reducing the firm’s optimal capital budget, Johnson can reduce new capital expenditures to €200 for all years, which in turn will change the firm’s sales. Instead of the original growth rate, 2016 net sales will increase 10% over 2015, and then grow at an annual rate of only 2% thereafter.
b. Finance growth through long-term debt. Instead of cutting growth, Johnson can try to finance growth by incurring long-term debt, with year-end balances of €2,500, €2,500, €3,500, €4,000, €4,000 for 2016 to 2020 respectively.
c. Finance growth through new equity financing. Rather than financing growth using long-term debt, Johnson can issue new equity of €3,500 (net proceeds) in 2016.
d. Finance growth using a mix of long-term debt and new equity. Johnson can try to finance growth by issuing new equity of €1,750 in 2016, and long-term debt with year?end balances of €1,500, €1,800, €2,500, and €3,000 in the years 2017 to 2020 respectively.
e. Finance growth by improving cash receipts. Instead of issuing new equity and/or new long-term debt, Johnson can try to finance growth by cutting the percentage of credit sales so that accounts receivable is only at 5% of its total sales for each year, and reduce inventory to 5% of the next year’s sale by reducing dealer inventories.
f. Ms. Lender points out that if Johnson is successful in financing the desired growth, shareholders may want a higher level of dividends. Therefore, she suggests an analysis of the impact of a higher level of dividends on its financial plan: using the financial growth plan specified in (d), increase the total dividend payout to €450 for 2018 and beyond.
Balance sheet 2016 2017 2018 2019 2020 ASSETS Cash 274 339 358 379 400 Marketable securities 50 50 50 50 50 Accounts receivable 2,430 2,916 3,062 3,215 3,376 Inventories 2,916 3,062 3,215 3,376 3,544 Total current assets 5,670 6,367 6,685 7,019 7,370 Loans to dealers 225 225 225 225 225 Plant (net of depreciation) 3,248 4,256 4,921 5,552 6,152 Equipment (net of depreciation) 1,537 1,655 1,670 1,684 1,697 Total fixed assets 5,010 6,136 6,816 7,461 8,074 Total assets 10,680 12,503 13,501 14,480 15,444 LIABILITIES AND EQUITY Accounts payable 1,823 2,187 2,296 2,411 2,532 Notes payables 0 0 0 0 0 Bank loan 975 975 975 975 975 Total current liabilities 2,798 3,162 3,271 3,386 3,507 Long-term load 0 0 0 0 0 Total fixed liabilities 0 0 0 0 0 Total current liabilities Ordinary shares 1,206 1,206 1,206 1,206 1,206 Retained earnings 6,677 8,135 9,024 9,888 10,731 Total Liabilities and equity 10,680 12,503 13,501 14,480 15,444 Profit statement 2016 2017 2018 2019 2020 Net Sales 16,200 19,440 20,412 21,433 22,504 Cost of goods sold Material and labour 12,150 14,580 15,309 16,074 16,878 Overhead 1,296 1,555 1,633 1,715 1,800 Earnings before interest and tax 2,754 3,305 3,470 3,644 3,826 Interest expenses 72 140 120 120 120 Earnings before tax 2,682 3,165 3,350 3,524 3,706 Taxes at 40% 1,073 1,266 1,340 1,409 1,482 Earnings after tax 1,609 1,899 2,010 2,114 2,223 Dividends 300 300 300 300 300 Retained earnings 1,309 1,599 1,710 1,814 1,923 Cash flow statement 2016 2017 2018 2019 2020 Net income from operations 1609 1899 2010 2114 2223 OPERATING ACTIVITIES Adjustments to convert to cash basis Accounts receivable increase 645 486 146 153 161 Inventories increase 951 146 153 161 168 Accounts payable increase 143 365 109 115 121 Depreciation 231 274 321 355 417 156 1632 1820 1915 2015 FINANCING ACTIVITIES Notes payable decrease 0 0 0 0 0 Bank loan increase 0 0 0 0 0 Dividends 300 300 300 300 300 -300 -300 -300 -300 -300 INVESTING ACTIVITIES Loans to dealers increase 0 0 0 0 0 Plant increase 548 1008 665 631 600 Equipment increase 22 118 15 14 13 -570 -1126 -680 -645 -613 Decrease in cash -714 206 840 970 1102Explanation / Answer
Analysts use a large range of units in observe, starting from the easy to the sophisticated. These items probably make very special assumptions about pricing, however they do share some fashioned characteristics and will also be categorised in broader terms. There are a couple of benefits to any such classification -- it's easier to appreciate where character items slot in to the tremendous snapshot, why they provide different outcome, and when they have got major blunders in common sense.
Query 1 - DCF Valuation Fundamentals
Discounted cash go with the flow valuation is situated upon the thought that the value of an asset is the reward value of the anticipated money flows on that asset, discounted at a cost that reflects the riskiness of those money flows. Specify whether or not the following statements about discounted money glide valuation are real or false, assuming that each one variables are steady besides for the variable mentioned below:
A. As the reduction fee raises, the worth of an asset raises.
B. As the anticipated growth expense in money flows increases, the worth of an asset increases.
C. Because the life of an asset is lengthened, the value of that asset raises.
D. As the uncertainty about the anticipated cash flows increases, the value of an asset increases.
E. An asset with an infinite lifestyles (i.E., it's expected to final without end) could have a limiteless price.
Question 2 - methods to DCF Valuation
There are two strategies to valuation. The primary technique is to value the equity within the corporation. The 2nd method is to value the entire company. What is the distinction? Why does it matter?
Question three - Mismatching money flows and discount premiums
the following are the projected money flows to equity and to the organization over the subsequent five years:
year
CF to equity
Int (1-t)
CF to company
1
$250.00
$90.00
$340.00
2
$262.50
$ninety four.50
$357.00
three
$275.63
$ninety nine.23
$374.Eighty five
4
$289.Forty one
$104.19
$393.Fifty nine
5
$303.88
$109.Forty
$413.27
Terminal price
$3,946.50
$6,000.00
(The terminal worth is the worth of the fairness or organization at the finish of year 5.)
The company has a price of fairness of 12% and a cost of capital of 9.Ninety four%. Answer the following questions:
A. What's the price of the equity in this company?
B. What's the worth of the organization?
Query 4 - issues in DCF Valuation
Why would discounted money drift valuation be elaborate to do for the next types of organizations?
A. A confidential company, where the proprietor is planning to promote the firm.
B. A biotechnology company, without a current merchandise or earnings, however with a couple of promising product patents within the pipeline.
C. A cyclical organization, for the duration of a recession.
D. A afflicted organization, which has made significant losses and is not expected to get out of difficulty for a couple of years.
E. A organization, which is within the procedure of restructuring, the place it is promoting some of its assets and changing its economic mix.
F. A company, which owns a variety of priceless land that is currently unutilized.
Question 5 - Relative Valuation: Fundamentals
An analyst tells you that he uses price/gains multiples, alternatively than discounted money float valuation, to price stocks, because he does now not like making assumptions about fundamentals - progress, danger, and payout ratios. Is his reasoning correct?
Query 6 - enterprise typical P/E Ratios
you are estimating the rate/gains a couple of to use to price Paramount company, with the aid of looking at the normal rate/gains multiple of related organizations. The next are the rate/earnings ratios of organizations in the amusement trade.
Firm P/E Ratio
Disney (Walt) 22.09
Time Warner 36.00
King World Productions 14.10
New Line Cinema 26.70
CCL 19.12
PLG 23.33
CIR 22.Ninety one
GET 97.60
GTK 26.00
A. What's the common P/E ratio?
B. Would you use all the similar firms in calculating the usual? Why or why no longer?
C. What assumptions are you making while you use the enterprise-natural P/E ratio to worth Paramount Communications?