SETTING UP THE FINANCIAL STATEMENT MODEL

Sales growth 10%

Current assets/Sales 15%
Current liabilities/Sales 8%
Net fixed assets/Sales 77%
Costs of goods sold/Sales 50%
Depreciation rate 10%
Interest rate on debt 10.00%
Interest paid on cash and marketable securities 8.00%
Tax rate 40%
Dividend payout ratio 40%
1. Pro forma
Year 0 1
Income statement
Sales 1,000 1,100
Costs of goods sold (500) 550
Interest payments on debt (32) (16)
Interest earned on cash and marketable securities 6 3.20
Depreciation (100) (15)
Profit before tax 374 1,622
Taxes (150) (649)
Profit after tax 225 973
Dividends (90) (389)
Retained earnings 135 584
Year 0 1
Balance sheet
Cash and marketable securities 80
Current assets 150
Fixed assets
At cost 1,070
Depreciation (300)
Net fixed assets 770
Total assets 1,000

Current liabilities 80
Debt 320
Stock 450
Accumulated retained earnings 150
Total liabilities and equity 1,000
2. Free cash flow Ebit+dep-increse in op.cur.ass+in op.cur.ass-in f.ass at cost + a
Year 0
 Free cash flow calculation
Profit after tax
Add back depreciation
Subtract increase in current assets
Add back increase in current liabilities
Subtract increase in fixed assets at cost
Add back after-tax interest on debt
Subtract after-tax interest on cash and+A14 mkt. securities
Free cash flow
3. Statement of cashflows
CONSOLIDATED STATEMENT OF CASH FLOWS: RECONCILING THE CASH BALANCES
Year 0 1
Cash flow from operating activities
Profit after tax -
Add back depreciation -
Adjust for changes in net working capital:
Subtract increase in current assets -
Add back increase in current liabilities -
Net cash from operating activities -

Cash flow from investing activities

Aquisitions of fixed assets—capital expenditures 1,070
Purchases of investment securities 0
Proceeds from sales of investment securities 0
Net cash used in investing activities 1,070

Cash flow from financing activities

Net proceeds from borrowing activities (320)
Net proceeds from stock issues, repurchases (450)
Dividends paid (389)
Net cash from financing activities (1,159)

Net increase in cash and cash equivalents (89)

Check: changes in cash and mkt. securities (80)
4. Valuing the firrm
Weighted average cost of capital 20%
Long-term free cash flow growth rate 5%

Year 0 1
FCF -
Terminal value
Total -
Enterprise value, present value of row 83 ₫640.18
Add in initial (year 0) cash and mkt. securities 80
Asset value in year 0 720.18
Subtract out value of firm's debt today (320)
Equity value 400.18
5. some notes on valuation procedure
Cash and marketable securities as negative debt
NPV of row 83 = enterprise value ₫640.18
Net year 0 debt: debt minus cash (240)
Equity value ₫400.18

Valuing the firm—using mid-year discounting

Weighted average cost of capital 20%
Long-term free cash flow growth rate 5%

Year 0 1
FCF -
Terminal value
Total -

Enterprise value, NPV of row 104 ₫701.28

Add in initial (year 0) cash and mkt. securities 80
Asset value in year 0 ₫781.28
Subtract out value of firm's debt today (320)
Equity value ₫461.28

Data table: The effect of sales growth (cell B25) on equity valuation
Growth ₫461.28 Chart Title
0% ₫12.00
2%
₫10.00
4%
6% ₫8.00
8%
10% ₫6.00
12%
₫4.00
14%
16% ₫2.00
18%
20% ₫0.00
0% 10% 20% 30%
 ₫461.28 12% 22%
3.0%
3.5%
4.0%
4.5%
Long-growth 5%
5.5%
6.0%
6.5%
7.0%
op.cur.ass-in f.ass at cost + after tax net interest payments
 Chart Title
2.00

0.00

8.00

6.00

4.00

2.00

0.00
0% 10% 20% 30%
24% 26% 28%
SETTING UP THE FINANCIAL STATEMENT MODEL
Sales growth 10%
Current assets/Sales 15%
Current liabilities/Sales 8%
Net fixed assets/Sales 77%
Costs of goods sold/Sales 50%
Depreciation rate 10%
Interest rate on debt 10.00%
Interest paid on cash and marketable securities 8.00%
Tax rate 40%
Dividend payout ratio 40%
1. Pro forma
Year 0 1 2
Income statement
Sales 1,000 1,100 1,210
Costs of goods sold (500) (550) (605)
Interest payments on debt (32) (32) (32)
Interest earned on cash and marketable securities 6 8.95 14.28
Depreciation (100) (117) (137)
Profit before tax 374 410 450
Taxes (150) (164) (180)
Profit after tax 225 246 270
Dividends (90) (98) (108)
Retained earnings 135 148 162
Year 0 1 2
Balance sheet
Cash and marketable securities 80 144 213
Current assets 150 165 182
Fixed assets
At cost 1,070 1,264 1,486
Depreciation (300) (417) (554)
Net fixed assets 770 847 932
Total assets 1,000 1,156 1,326

Current liabilities 80 88 97
Debt 320 320 320
Stock 450 450 450
Accumulated retained earnings 150 298 460
Total liabilities and equity 1,000 1,156 1,326
2. Free cash flow Ebit+dep-increse in op.cur.ass+in op.cur.ass-in f.ass at cost + a
Year 0 1 2
Free cash flow calculation
Profit after tax 246 270
Add back depreciation 117 137
Subtract increase in current assets (15) (17)
Add back increase in current liabilities 8 9
Subtract increase in fixed assets at cost (194) (222)
Add back after-tax interest on debt 19 19
Subtract after-tax interest on cash and+A14 mkt. securities (5) (9)
Free cash flow 176 188
3. Statement of cashflows
CONSOLIDATED STATEMENT OF CASH FLOWS: RECONCILING THE CASH BA
Year 0 1 2
Cash flow from operating activities
Profit after tax 246 270
Add back depreciation 117 137
Adjust for changes in net working capital:
Subtract increase in current assets (15) (17)
Add back increase in current liabilities 8 9
Net cash from operating activities 356 400

Cash flow from investing activities

Aquisitions of fixed assets—capital expenditures (194) (222)
Purchases of investment securities 0 0
Proceeds from sales of investment securities 0 0
Net cash used in investing activities (194) (222)

Cash flow from financing activities

Net proceeds from borrowing activities - -
Net proceeds from stock issues, repurchases - -
Dividends paid (98) (108)
Net cash from financing activities (98) (108)

Net increase in cash and cash equivalents 64 70

Check: changes in cash and mkt. securities 64 70
4. Valuing the firrm
Weighted average cost of capital 20%
Long-term free cash flow growth rate 5% Real growth = 2% + inflation = 3

Year 0 1 2
FCF 176 188
Terminal value
Total 176 188
Enterprise value, present value of row 83 ₫1,230.89
Add in initial (year 0) cash and mkt. securities 80
Asset value in year 0 1,310.89
Subtract out value of firm's debt today (320)
Equity value 990.89
5. some notes on valuation procedure
Cash and marketable securities as negative debt
NPV of row 83 = enterprise value ₫1,230.89
Net year 0 debt: debt minus cash (240)
Equity value ₫990.89

Valuing the firm—using mid-year discounting

Weighted average cost of capital 20%
Long-term free cash flow growth rate 5%

Year 0 1 2
FCF 176 188
Terminal value
Total 176 188

Enterprise value, NPV of row 104 ₫1,348.37

Add in initial (year 0) cash and mkt. securities 80
Asset value in year 0 ₫1,428.37
Subtract out value of firm's debt today (320)
Equity value ₫1,108.37

Data table: The effect of sales growth (cell B25) on equity valuation
Growth ₫1,108.37 C
0% ₫12.00
2%
₫10.00
4%
6% ₫8.00
8%
10% ₫6.00
12%
₫4.00
14%
16% ₫2.00
18%
20% ₫0.00
0% 5%
 ₫1,108.37 12% 14%
3.0%
3.5%
4.0%
4.5%
Long-growth 5%
5.5%
6.0%
6.5%
7.0%
 3 4 5

1,331 1,464 1,611

(666) (732) (805)
(32) (32) (32)
20.08 26.38 33.18
(161) (189) (220)
492 538 587
(197) (215) (235)
295 323 352
(118) (129) (141)
177 194 211
3 4 5

289 371 459

200 220 242

1,740 2,031 2,364

(715) (904) (1,124)
1,025 1,127 1,240
1,513 1,718 1,941

106 117 129

320 320 320
450 450 450
637 830 1,042
1,513 1,718 1,941
op.cur.ass-in f.ass at cost + after tax net interest payments
3 4 5
 295 323 352
161 189 220
(18) (20) (22)
10 11 12
(254) (291) (333)
19 19 19
(12) (16) (20)
201 214 228

CONCILING THE CASH BALANCES

3 4 5

295 323 352

161 189 220

(18) (20) (22)

10 11 12
448 502 562

(254) (291) (333)

0 0 0
0 0 0
(254) (291) (333)

- - -
- - -
(118) (129) (141)
(118) (129) (141)

76 82 88
76 82 88

al growth = 2% + inflation = 3%

3 4 5
201 214 228
1,598
201 214 1,826
 3 4 5
201 214 228
1,598
201 214 1,826

Chart Title
12.00

10.00

₫8.00

₫6.00

₫4.00

₫2.00

₫0.00
0% 5% 10% 15% 20% 25%
 WACC
16% 18% 20% 22% 24% 26% 28%
FIXED ASSETS AT COST IS A FUNCTION OF SALES
Sales growth 10%
Current assets/Sales 15%
Current liabilities/Sales 8%
Fixed assets at cost/Sales 107%
Costs of goods sold/Sales 50%
Depreciation rate 10%
Interest rate on debt 10.00%
Interest paid on cash and marketable securities 8.00%
Tax rate 40%
Dividend payout ratio 40%

Year 0 1 2
Income statement
Sales 1,000 1,100 1,210
Costs of goods sold (500) (550) (605)
Interest payments on debt (32) (32) (32)
Interest earned on cash and marketable securities 6 12.35 25.07
Depreciation (100) (112) (124)
Profit before tax 374 418 474
Taxes (150) (167) (190)
Profit after tax 225 251 285
Dividends (90) (100) (114)
Retained earnings 135 150 171
Year 0 1 2
Balance sheet
Cash and marketable securities 80 229 398
Current assets 150 165 182
Fixed assets
At cost 1,070 1,177 1,295
Depreciation (300) (412) (536)
Net fixed assets 770 765 759
Total assets 1,000 1,158 1,338

Current liabilities 80 88 97
Debt 320 320 320
Stock 450 450 450
Accumulated retained earnings 150 300 471
Total liabilities and equity 1,000 1,158 1,338
 3 4 5

1,331 1,464 1,611

(666) (732) (805)
(32) (32) (32)
39.48 55.78 74.16
(136) (150) (164)
537 606 683
(215) (243) (273)
322 364 410
(129) (146) (164)
193 218 246
3 4 5

589 805 1,049

200 220 242

1,424 1,567 1,723 =$B$5*G15

(672) (821) (986) =F31+G19
752 745 737 =G30+G31
1,541 1,770 2,028

106 117 129

320 320 320
450 450 450
665 883 1,129
1,541 1,770 2,028
FIXED ASSETS AT COST IS A FUNCTION OF SALES
Sales growth 10%
Current assets/Sales 15%
Current liabilities/Sales 8%
Fixed assets at cost/Sales constant
Costs of goods sold/Sales 50%
Depreciation rate 10%
Interest rate on debt 10.00%
Interest paid on cash and marketable securities 8.00%
Tax rate 40%
Dividend payout ratio 40%

Year 0 1 2
Income statement
Sales 1,000 1,100 1,210
Costs of goods sold (500) (550) (605)
Interest payments on debt (32) (32) (32)
Interest earned on cash and marketable securities 6 12.13 24.37
Depreciation (100) (113) (124)
Profit before tax 374 418 473
Taxes (150) (167) (189)
Profit after tax 225 251 284
Dividends (90) (100) (113)
Retained earnings 135 150 170
Year 0 1 2
Balance sheet
Cash and marketable securities 80 223 386
Current assets 150 165 182
Fixed assets
At cost 1,070 1,183 1,307
Depreciation (300) (413) (537)
Net fixed assets 770 770 770
Total assets 1,000 1,158 1,337

Current liabilities 80 88 97
Debt 320 320 320
Stock 450 450 450
Accumulated retained earnings 150 300 471
Total liabilities and equity 1,000 1,158 1,337
2. Free cash flow Ebit+dep-increse in op.cur.ass+in op.cur.ass-in f.ass at cost + a
Year 0 1 2
Free cash flow calculation
Profit after tax 251 284
Add back depreciation 113 124
Subtract increase in current assets (15) (17)
Add back increase in current liabilities 8 9
Subtract increase in fixed assets at cost (113) (124)
Add back after-tax interest on debt 19 19
Subtract after-tax interest on cash and+A14 mkt. securities (7) (15)
Free cash flow 255 281
 3 4 5

1,331 1,464 1,611

(666) (732) (805)
(32) (32) (32)
38.22 53.87 71.49
(138) (152) (168)
534 602 677
(214) (241) (271)
320 361 406
(128) (144) (162)
192 217 244
3 4 5

570 777 1,010

200 220 242

1,445 1,597 1,765 =$B$5*G15

(675) (827) (995) =F31+G19
770 770 770 =G30+G31
1,539 1,767 2,022

106 117 129

320 320 320
450 450 450
663 879 1,123
1,539 1,767 2,022
s+in op.cur.ass-in f.ass at cost + after tax net interest payments
3 4 5

320 361 406

 138 152 168
(18) (20) (22)
10 11 12
(138) (152) (168)
19 19 19
(23) (32) (43)
308 339 372
 NEGATIVE CASH BALANCES: ILLUSTRATION
Sales growth 20% <-- Increased from 10%
Current assets/Sales 20% <-- Increased from 15%
Current liabilities/Sales 8%
Net fixed assets/Sales 80% <-- Increased from 77%
Costs of goods sold/Sales 50%
Depreciation rate 10%
Interest rate on debt 10.00%
Interest paid on cash and marketable securities 8.00%
Tax rate 40%
Dividend payout ratio 50% <-- Increased from 40%

Year 0 1 2
Income statement
Sales 1,000 1,200 1,440
Costs of goods sold (500) (600) (720)
Interest payments on debt (40) (40) (40)
Interest earned on cash and marketable securities 6 4.32 (0.30)
Depreciation (100) (124) (156)
Profit before tax 366 440 524
Taxes (147) (176) (210)
Profit after tax 220 264 314
Dividends (110) (132) (157)
Retained earnings 110 132 157
Year 0 1 2
Balance sheet
Cash and marketable securities 80 28 (36)
Current assets 200 240 288
Fixed assets
At cost 1,100 1,384 1,732
Depreciation (300) (424) (580)
Net fixed assets 800 960 1,152
Total assets 1,080 1,228 1,404

Current liabilities 80 96 115

Debt 400 400 400
Stock 450 450 450
Accumulated retained earnings 150 282 439
Total liabilities and equity 1,080 1,228 1,404
2. Free cash flow
Year 0 1 2
Free cash flow calculation
Profit after tax 264 314
Add back depreciation 124 156
Subtract increase in current assets (40) (48)
Add back increase in current liabilities 16 19
Subtract increase in fixed assets at cost (284) (348)
Add back after-tax interest on debt 24 24
Subtract after-tax interest on cash and+A14 mkt. securities (3) 0
Free cash flow 101 118
USTRATION

3 4 5

1,728 2,074 2,488

(864) (1,037) (1,244)
(40) (40) (40)
(5.96) (12.89) (21.36)
(194) (242) (299)
624 742 884
(249) (297) (354)
374 445 530
(187) (223) (265)
187 223 265
3 4 5

(113) (209) (325)

346 415 498

2,157 2,675 3,306

(774) (1,016) (1,315)
1,382 1,659 1,991
1,615 1,865 2,163

138 166 199

400 400 400
450 450 450
626 849 1,114
1,615 1,865 2,163

3 4 5

374 445 530

 194 242 299
(58) (69) (83)
23 28 33
(425) (518) (631)
24 24 24
4 8 13
137 159 186
 NO NEGATIVE CASH BALANCES
Sales growth 20% <-- Increased from 10%
Current asset 20% <-- Increased from 15%
Current liabil 8%
Net fixed asse 80% <-- Increased from 77%
Costs of good 50%
Depreciation 10%
Interest rate 10.00%
Interest paid 8.00%
Tax rate 40%
Dividend payo 50% <-- Increased from 40%

Year 0 1 2 3 4 5
Income statement
Sales 1,000 1,200 1,440 1,728 2,074 2,488
Costs of good (500) (600) (720) (864) (1,037) (1,244)
Interest paym (40) (40) (42) (47) (56) (67)
Interest earn 6 4.32 1.12 - - -
Depreciation (100) (124) (156) (194) (242) (299)
Profit before 366 440 524 622 739 878
Taxes (147) (176) (209) (249) (296) (351)
Profit after t 220 264 314 373 443 527
Dividends (110) (132) (157) (187) (222) (263)
Retained earn 110 132 157 187 222 263
Year 0 1 2 3 4 5
Balance sheet
Cash and marke 80 28 - - - -
Current asset 200 240 288 346 415 498
Fixed assets
At cost 1,100 1,384 1,732 2,157 2,675 3,306
Depreciat (300) (424) (580) (774) (1,016) (1,315)
Net fixed 800 960 1,152 1,382 1,659 1,991
Total assets 1,080 1,228 1,440 1,728 2,074 2,488

Current liabili 80 96 115 138 166 199

Debt 400 400 436 514 610 728
Stock 450 450 450 450 450 450
Accumulated 150 282 439 626 847 1,111
Total liabiliti 1,080 1,228 1,440 1,728 2,074 2,488
TARGET DEBT/EQUITY RATIO
Cash is fixed, ratio of debt/equity changes in each year
Sales growth 10%
Current assets/Sales 15%
Current liabilities/Sales 8%
Net fixed assets/Sales 77%
Costs of goods sold/Sales 50%
Depreciation rate 10%
Interest rate on debt 10.00%
Interest paid on cash & marketable securities 8.00%
Tax rate 40%
Dividend payout ratio 60%

Year 0 1
Income statement
Sales 1,000 1,100
Costs of goods sold (500) (550)
Interest payments on debt (32) (30)
Interest earned on cash and marketable securities 6 6.40
Depreciation (100) (117)
Profit before tax 374 409
Taxes (150) (164)
Profit after tax 225 246
Dividends (135) (147)
Retained earnings 90 98
Year 0 1
Balance sheet
Cash and marketable securities 80 80
Current assets 150 165
Fixed assets
At cost 1,070 1,264
Depreciation (300) (417)
Net fixed assets 770 847
Total assets 1,000 1,092

Current liabilities 80 88
Debt 320 287
Stock 450 469
Accumulated retained earnings 150 248
Total liabilities and equity 1,000 1,092

Target debt/equity ratio 0.53 0.40

 2 3 4 5

1,210 1,331 1,464 1,611

(605) (666) (732) (805)
(29) (28) (29) (32)
6.40 6.40 6.40 6.40
(137) (161) (189) (220)
445 483 521 560
(178) (193) (208) (224)
267 290 313 336
(160) (174) (188) (202)
107 116 125 134
2 3 4 5

80 80 80 80
182 200 220 242

1,486 1,740 2,031 2,364

(554) (715) (904) (1,124)
932 1,025 1,127 1,240
1,193 1,305 1,427 1,562

97 106 117 129

284 276 302 331
457 451 412 372
355 471 596 730
1,193 1,305 1,427 1,562

0.35 0.30 0.30 0.30