The following sheet presents the balance sheet and value drivers of Yummy Compan
ID: 2780912 • Letter: T
Question
The following sheet presents the balance sheet and value drivers of Yummy Company, which manufactures a very special tomato sauce. (You might want to copy the table into Excel.)
Yummy Company, Financial Model
Value Drivers
Sales growth
12%
Current assets/Sales
22%
Current liabilities/Sales
20%
Net fixed assets growth rate
5%
Cost of goods sold/sales
45%
Depreciation rate (of average fixed assets at cost)
20%
interest rate on debt
8%
interest earned on cash balances
4%
tax rate
36%
dividend payout ratio
25%
sales
2000000
WACC
16%
long term FCF growth rate
4%
Balance sheet
Cash
460000
Current assets
440000
Fixed Assets
At cost
4000000
Depreciation
500000
Net fixed assets
3500000
total assets
4400000
Current liabilities
400000
Debt
3000000
Stock (1500000 shares, issued at $0.5 each)
750000
accumulated retained earnings
250000
Total Liabilities + Equity
4400000
Additional model assumptions are as follows:
The FCF evaluation is for a 5-year period. In addition, a terminal value should be determined using the long-term FCF growth rate.
The debt principal repayments are $300,000 each year.
Cash is a plug in the model.
A). Make a pro forma model for Yummy and computer the firm value using a DCF valuation model with year-end discounting. (Price per share: -3.16).
B). Show in a graph the sensitivity of the enterprise value to the growth in sales
C). Show in a graph the sensitivity of the enterprise value to the company’s WACC.
Yummy Company, Financial Model
Value Drivers
Sales growth
12%
Current assets/Sales
22%
Current liabilities/Sales
20%
Net fixed assets growth rate
5%
Cost of goods sold/sales
45%
Depreciation rate (of average fixed assets at cost)
20%
interest rate on debt
8%
interest earned on cash balances
4%
tax rate
36%
dividend payout ratio
25%
sales
2000000
WACC
16%
long term FCF growth rate
4%
Balance sheet
Cash
460000
Current assets
440000
Fixed Assets
At cost
4000000
Depreciation
500000
Net fixed assets
3500000
total assets
4400000
Current liabilities
400000
Debt
3000000
Stock (1500000 shares, issued at $0.5 each)
750000
accumulated retained earnings
250000
Total Liabilities + Equity
4400000
Explanation / Answer
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FCF = Free Cash Flow;
A). Making a pro forma model for Yummy and computer the firm value using a DCF valuation model with year-end discounting. (Price per share: -3.16).
Pro forma model:
Cash Inflow:
Cash Out flow:
Gross Income:
Less: Taxes
Net Income:
Earnings before Interest and Tax: EBIT
Less: Interest for debentures
Ordinary Shares:
Earnings after Interest and before Tax: EAIBT
Less: Corporate Tax of c%
Earnings after Interest and after Tax: EAIAT
Preference Shares:
Earnings available to share holders
Divide by the shares volume:
We get,
Earnings Per Share (EPS):
Value of the Firm V = S + D
= Stocks + Debentures
= 750,000 + 3 million debt
Firm Value = $3,750,000
Part b)
Showing in a graph the sensitivity of the enterprise value to the growth in sales
Enterprise value
$3,750,000
Sales growth
$2,000,000
$2,240,000.00
C). Showing in a graph the sensitivity of the enterprise value to the company’s WACC.
Part C)
Weighted Average Cost of Capital (WACC):
WACC = Equity / (Equity + Debt) * Cost of Equity + Debt / (Equity Plus Debt)
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Enterprise value
$3,750,000
Sales growth
$2,000,000
$2,240,000.00