ABC company just completed a business strategy for the next 5 years that is plan
ID: 2628477 • Letter: A
Question
ABC company just completed a business strategy for the next 5 years that is planned to result in increasing sales growth and slightly improve its operating margin. (Note: the operating margin includes depreciation expense). This business plan will require reinvestment of NOPAT to grow the business and will require incremental working capital and net fixed capital investments of 25% of NOPAT.
Prior year sales were 600M and are planned to grow by 5% in the first year followed by 6% and 7% in the next two years. In years 4 and 5 of the forecast period sales are expected to level off to a 6% growth rate after that. Improvements in operating costs are expected to improve the operating margin to 10% in year 1, increasing to 11% in the second year and to 12% in year 3. However, competitive pressures and increased costs are expected to shrink margins to 11% in years 4 and 5.
Taxes will remain at 40% and the WACC for ABC company is 12%.
Determine the FCF (Free Cash Flow) for the 5 year forecast period.
Determine the present value of this 5 year forecast period
Explanation / Answer
Miller Technologies recently reported the following balance sheet in its annual report (all numbers are in millions of dollars):
Cash
$ 100
Accounts payable
$ 300
Accounts receivable
300
Notes payable
500
Inventory
500
Total current liabilities
$ 800
Total current assets
$ 900
Long-term debt
1,500
Total debt
$2,300
Common stock
500
Retained earnings
400
Net fixed assets
2,300
Total common equity
$ 900
Total assets
$3,200
Total liabilities and equity
$3,200
Cash
$ 100
Accounts payable
$ 300
Accounts receivable
300
Notes payable
500
Inventory
500
Total current liabilities
$ 800
Total current assets
$ 900
Long-term debt
1,500
Total debt
$2,300
Common stock
500
Retained earnings
400
Net fixed assets
2,300
Total common equity
$ 900
Total assets
$3,200
Total liabilities and equity
$3,200