Anderson Company has the following information for 2009. Total sales $783 millio
ID: 2821049 • Letter: A
Question
Anderson Company has the following information for 2009.
Total sales
$783 million
Accounts receivable (average)
$82 million
Accounts payable (average)
$75 million
Inventory (average)
$100 Million
Cost of Goods Sold
$616 million
Cost of Capital
11%
Income Tax Rate
32%
Find the NPV of one cycle of the company. Find the value of Anderson based on its operations.
Total sales
$783 million
Accounts receivable (average)
$82 million
Accounts payable (average)
$75 million
Inventory (average)
$100 Million
Cost of Goods Sold
$616 million
Cost of Capital
11%
Income Tax Rate
32%
Explanation / Answer
Answer to question: In proper sequence:
Profit before tax = Sales – Cost of goods sold = ($783 - $616) million = $167 million
Profit after tax = $167 million * (1 – 32%) = $113.56 million
Increase in working capital = Accounts Receivable + Inventory – Accounts Payable = ($82+$100-$75) million = $107 million
It is assumed that the given figure of receivables, payables and inventory are incremental figures
Annual Free cash flow = Profit after tax – increase in working capital = ($113.56 - $107) million = $6.56 million
Discounting Rate = 11%
NPV of one cycle = Annual Free cash flow / (1+discounting rate) = $6.56 milllion / 1.11 = $5.91 million
Value of Anderson = Annual Free Cash Flow / Discounting Rate = $6.56 million / 0.11 = $59.64 million (It is assumed that growth rate is zero.)