Sales growth

Current assets/Sales
Current liabilities/Sales
Net fixed assets/Sales
Costs of goods sold/Sales
Depreciation rate
Interest rate on debt
Interest paid on cash and marketable securities
Tax rate
Dividend payout ratio
Year
Income statement
Sales
Costs of goods sold
Interest payments on debt
Interest earned on cash and marketable securities
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings

10%
15%
8%
77%
50%
10%
10.00%
8.00%
40%
40%
0

1,000
(500)
(32)
6
(100)
374
(150)
225
(90)
135

1,100
(550)
(32)
9
(117)
410
(164)
246
(98)
148

1,210
(605)
(32)
14
(137)
450
(180)
270
(108)
162

1,331
(666)
(32)
20
(161)
492
(197)
295
(118)
177

Balance sheet
Cash and marketable securities
Current assets
Fixed assets
At cost
Depreciation
Net fixed assets
Total assets

80
150

144
165

213
182

289
200

1,070
(300)
770
1,000

1,264
(417)
847
1,156

1,486
(554)
932
1,326

1,740
(715)
1,025
1,513

Current liabilities
Debt
Stock
Accumulated retained earnings
Total liabilities and equity

80
320
450
150
1,000

88
320
450
298
1,156

97
320
450
460
1,326

106
320
450
637
1,513

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

246
117
(15)
8
(194)
19
(5)
176

270
137
(17)
9
(222)
19
(9)
188

295
161
(18)
10
(254)
19
(12)
201

CONSOLIDATED STATEMENT OF CASH FLOWS: RECONCILING THE CASH BAL

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

246
117

270
137

295
161

(15)
8
356

(17)
9
400

(18)
10
448

(194)
0
0
(194)

(222)
0
0
(222)

(254)
0
0
(254)

Cash flow from financing activities

Net proceeds from borrowing activities
Net proceeds from stock issues, repurchases
Dividends paid
Net cash from financing activities

0
0
(98)
(98)

0
0
(108)
(108)

0
0
(118)
(118)

Net increase in cash and cash equivalents

Check: changes in cash and mkt. securities

64
64

70
70

76
76

Cash flow from investing activities

Aquisitions of fixed assets--capital expenditures
Purchases of investment securities
Proceeds from sales of investment securities
Net cash used in investing activities

=IF(B76<=B3,"nmf",B87)

=IF(B76<=B3,"nmf",B87)

1,464
(732)
(32)
26
(189)
538
(215)
323
(129)
194

1,611
(805)
(32)
33
(220)
587
(235)
352
(141)
211

#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?

371
220

459
242

#NAME?
#NAME?

2,031
(904)
1,127
1,718

2,364
(1,124)
1,240
1,941

#NAME?
#NAME?
#NAME?
#NAME?

117
320
450
830
1,718

129
320
450
1,042
1,941

#NAME?
#NAME?
#NAME?
#NAME?
#NAME?

323
189
(20)
11
(291)
19
(16)
214

352
220
(22)
12
(333)
19
(20)
228

#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?
#NAME?

ECONCILING THE CASH BALANCES

323
189

352
220

#NAME?
#NAME?

(20)
11
502

(22)
12
562

#NAME?
#NAME?
#NAME?

(291)
0
0
(291)

(333)
#NAME?
0 <-- Not in our model
0 <-- Not in our model
(333)
#NAME?

0
0
(129)
(129)

0
0
(141)
(141)

#NAME?
#NAME?
#NAME?
#NAME?

82
82

88
88

#NAME?
#NAME?

The answers for this question are given on the previous spreadsheet

EXERCISE 2
Sales growth
Current assets/Sales
Current liabilities/Sales
Net fixed assets/Sales
Costs of goods sold/Sales
Sales, general and administrative expenses
Depreciation rate
Interest rate on debt
Interest paid on cash & marketable securities
Tax rate
Dividend payout ratio
Year
Income statement
Sales
Costs of goods sold
SG&A
Interest payments on debt
Interest earned on cash & marketable securities
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings

10%
15%
8%
77%
50%
200 <-- Added
10%
10.00%
8.00%
40%
40%
0

1,000
(500)
(32)
6
(100)
374
(150)
225
(90)
135

1,100
(550)
(200)
(32)
6
(117)
207
(83)
124
(50)
75

1,210
(605)
(200)
(32)
5
(137)
241
(96)
145
(58)
87

1,331
(666)
(200)
(32)
5
(161)
277
(111)
166
(67)
100

Balance sheet
Cash and marketable securities
Current assets
Fixed assets
At cost
Depreciation
Net fixed assets
Total assets

80
150

71
165

65
182

63
200

1,070
(300)
770
1,000

1,264
(417)
847
1,083

1,486
(554)
932
1,178

1,740
(715)
1,025
1,288

Current liabilities
Debt
Stock
Accumulated retained earnings
Total liabilities and equity

80
320
450
150
1,000

88
320
450
225
1,083

97
320
450
311
1,178

106
320
450
411
1,288

Year
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

124
117
(15)
8
(194)
19

145
137
(17)
9
(222)
19

166
161
(18)
10
(254)
19

Subtract after-tax interest on cash & mkt. securities

Free cash flow

(4)
56

(3)
68

(3)
81

Valuing the firm

Weighted average cost of capital
Year
FCF
Terminal value
Total

20%
0

NPV of row 61
Add in initial (year 0) cash and mkt. securities
Enterprise value
Subtract out value of firm's debt today
Equity value

56

68

81

56

68

81

709 <-- =NPV(B56,C61:G61)

80
789
-320
469

Cash and marketable securities as negative debt

NPV of row 61 = enterprise value
Net year 0 debt
Equity value

709
-240 <-- =-B37+B28
469

Valuing the firm--using mid-year discounting

Year
FCF
Terminal value
Total

20%
0

NPV of row 81
Add in initial (year 0) cash and mkt. securities
Enterprise value
Subtract out value of firm's debt today
Equity value

Data table: Value as function

of SG&A

56

68

81

56

68

81

850 <-- =NPV(B76,C81:G81)*(1+B76)

80
930
-320
610

0
50
100
150
200
250
300
350
400
450
500
550

610 #NAME?
1,677
1,411
Effect
1,144
877
2,000
610
1,500
343
1,000
77
500
-190
0
-457
-500 0
-724
-1,000
-991
-1,500
-1,257
-2,000

Value

Weighted average cost of capital

of SG&A on Equi

Data table: Value as function

of SG&A and sales growth

600

-1,524

610
0
50
100
150
200
250
300
350
400
450
500
550
600

0%
1,028
848
668
488
308
128
nmf
nmf
nmf
nmf
nmf
nmf
nmf

-2,000

3%
1,143
947
752
557
362
166
nmf
nmf
nmf
nmf
nmf
nmf
nmf

6%
1,306
1,089
872
655
438
220
3
nmf
nmf
nmf
nmf
nmf
nmf

1,464
(732)
(200)
(32)
5
(189)
317
(127)
190
(76)
114

1,611
(805)
(200)
(32)
5
(220)
359
(144)
215
(86)
129

65
220

72
242

2,031
(904)
1,127
1,412

2,364
(1,124)
1,240
1,553

117
320
450
525
1,412

129
320
450
654
1,553

190
189
(20)
11
(291)
19

215
220
(22)
12
(333)
19

(3)
94

(3)
108

5
94
94

108
1,191 <-- =G59*(1+B3)/(B56-B3)
1,300

5
94
94

108
1,191 <-- =G72*(1+B3)/(B69-B3)
1,300

Effect of SG&A on Equity Value

100

200

300

400

500

600

SG&A

9%
1,559
1,308
1,057
806
555
304
53
nmf
nmf
nmf
nmf
nmf
nmf

12%
2,002
1,692
1,382
1,071
761
451
141
nmf
nmf
nmf
nmf
nmf
nmf

15%
2,976
2,536
2,095
1,655
1,214
774
333
nmf
nmf
nmf
nmf
nmf
nmf

EXERCISE 3
Sales growth
Current assets/Sales
Current liabilities/Sales
Fixed assets at cost/Sales
Costs of goods sold/Sales
Depreciation rate
Interest rate on debt
Interest paid on cash & marketable securities
Tax rate
Dividend payout ratio
Year
Income statement
Sales
Costs of goods sold
Interest payments on debt
Interest earned on cash & marketable securities
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings

10%
15%
8%
100%
50%
10%
10.00%
8.00%
40%
40%
0

1,000
(500)
(32)
6
(100)
374
(150)
225
(90)
135

1,100
(550)
(32)
(18)
(109)
392
(157)
235
(94)
141

1,210
(605)
(32)
(45)
(116)
412
(165)
247
(99)
148

1,331
(666)
(32)
(52)
(127)
454
(182)
272
(109)
163

Balance sheet
Cash and marketable securities
Current assets
Fixed assets
At cost
Depreciation
Net fixed assets
Total assets

80
150

(524)
165

(609)
182

(702)
200

1,070
(300)
770
1,000

1,100
(409)
1,509
1,149

1,210
(524)
1,734
1,306

1,331
(651)
1,982
1,479

Current liabilities
Debt
Stock
Accumulated retained earnings
Total liabilities and equity

80
320
450
150
1,000

88
320
450
291
1,149

97
320
450
439
1,306

106
320
450
603
1,479

Year
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 & mkt. securities
Free cash flow

235
109
(15)
8
(30)
19
11
336

247
116
(17)
9
(110)
19
27
292

272
127
(18)
10
(121)
19
31
321

Valuing the firm

Weighted average cost of capital
Year
FCF
Terminal value
Total
NPV of row 61
Add in initial (year 0) cash and mkt. securities
Enterprise value
Subtract out value of firm's debt today
Equity value

20%
0

336

292

321

336

292

321

2,710 #NAME?
80
2,790
-320
2,470

Cash and marketable securities as negative debt

NPV of row 61 = enterprise value
Net year 0 debt
Equity value

2,710
-240 #NAME?
2,470

Valuing the firm--using half-year discounting

Weighted average cost of capital
Year
FCF
Terminal value
Total
NPV of row 81
Add in initial (year 0) cash and mkt. securities
Enterprise value
Subtract out value of firm's debt today
Equity value

20%
0

336

292

321

336

292

321

3,251 #NAME?
80
3,331
-320
3,011

Growth
0%
2%
4%
6%
8%
10%
12%
14%
16%

3,011 #NAME?
1,028
1,100
1,191
1,306
1,461
1,677
2,002
2,543
3,625

4,000
3,000
2,000
1,000
0
0%

#NAME?

growth rate of sales

3,011.40
0%
2%
4%
6%
8%
10%
12%
14%
16%

WACC
10%
2,030.04
2,458.87
3,173.58
4,603.01
8,891.30
nmf
nmf
nmf
nmf

12%
1,696.78
1,970.59
2,381.29
3,065.80
4,434.82
8,541.87
nmf
nmf
nmf

14%
1,458.43
1,644.72
1,905.52
2,296.72
2,948.73
4,252.74
8,164.77
nmf
nmf

1,464
(732)
(32)
(60)
(140)
500
(200)
300
(120)
180

1,611
(805)
(32)
(69)
(154)
551
(220)
330
(132)
198

(805)
220

(917)
242

1,464
(791)
2,255
1,670

1,611
(945)
2,555
1,880

117
320
450
783
1,670

129
320
450
981
1,880

300
140
(20)
11
(133)
19
36
353

330
154
(22)
12
(146)
19
41
388

5
353

388
4,268 #NAME?
4,656

353

5
353

388
4,268 #NAME?
4,656

353

Sales Growth and Equity Value

4,000
3,000
2,000
1,000
0
0%

5%

10%

15%

20%

16%
1,279.41
1,411.68
1,588.03
1,834.92
2,205.27
2,822.51
4,056.99
7,760.42
nmf

18%
1,139.96
1,236.67
1,361.01
1,526.79
1,758.89
2,107.03
2,687.27
3,847.75
7,329.19

20%
1,028.23
1,100.37
1,190.54
1,306.48
1,461.06
1,677.48
2,002.10
2,543.14
3,625.21

22%
936.67
991.18
1,057.80
1,141.07
1,248.14
1,390.90
1,590.76
1,890.55
2,390.21

24%
860.24
901.71
951.47
1,012.28
1,088.30
1,186.04
1,316.36
1,498.80
1,772.47

26%
795.47
827.04
864.35
909.13
963.85
1,032.26
1,120.21
1,237.48
1,401.65

EXERCISE 4--ASSETS AT COST GIVEN BY A STEP FUNCTION

Sales growth
Current assets/Sales
Current liabilities/Sales
Costs of goods sold/Sales
Depreciation rate
Interest rate on debt
Interest paid on cash & marketable securities
Tax rate
Dividend payout ratio
Year
Income statement
Sales
Costs of goods sold
Interest payments on debt
Interest earned on cash & marketable securities
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings

10%
15%
8%
50%
10%
10.00%
8.00%
40%
40%
0

1,000
(500)
(32)
6
(100)
374
(150)
224
(90)
135

1,100
(550)
(32)
15
(109)
425
(170)
255
(102)
153

1,210
(605)
(32)
31
(115)
489
(196)
293
(117)
176

1,331
(666)
(32)
47
(126)
554
(222)
332
(133)
199

Balance sheet
Cash and marketable securities
Current assets
Fixed assets
At cost
Depreciation
Net fixed assets
Total assets

80
150

304
165

479
182

688
200

1,070
(300)
770
1,000

1,100
(409)
692
1,161

1,209
(524)
685
1,346

1,318
(650)
668
1,555

Current liabilities
Debt
Stock
Accumulated retained earnings
Total liabilities and equity

80
320
450
150
1,000

88
320
450
303
1,161

97
320
450
479
1,346

106
320
450
678
1,555

Year
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 & mkt. securities
Free cash flow

255
109
(15)
8
(30)
19
(9)
336

293
115
(17)
9
(109)
19
(19)
292

332
126
(18)
10
(109)
19
(28)
332

Valuing the firm

Weighted average cost of capital
Year
FCF
Terminal value
Total
NPV of row 61
Add in initial (year 0) cash and mkt. securities
Enterprise value
Subtract out value of firm's debt today
Equity value

20%
0

336

292

332

336

292

332

2,858 <-- =NPV(B56,C61:G61)

80
2,938
-320
2,618

Cash and marketable securities as negative debt

NPV of row 61 = enterprise value
Net year 0 debt
Equity value

2,858
-240 <-- =-B37+B28
2,618

Valuing the firm--using half-year discounting

Weighted average cost of capital
Year
FCF
Terminal value
Total
NPV of row 81
Add in initial (year 0) cash and mkt. securities
Enterprise value
Subtract out value of firm's debt today
Equity value

20%
0

336

292

332

336

292

332

3,430 <-- =NPV(B76,C81:G81)*(1+B76)

80
3,510
-320
3,190

EP FUNCTION

1,464
(732)
(32)
65
(137)
627
(251)
376
(151)
226

1,611
(805)
(32)
85
(149)
710
(284)
426
(170)
255

928
220

1,205
242

1,431
(788)
644
1,791

1,548
(937)
612
2,058

117
320
450
904
1,791

129
320
450
1,160
2,058

376
137
(20)
11
(113)
19
(39)
372

426
149
(22)
12
(117)
19
(51)
415

5
372
372

415
4,569
4,984

5
372
372

415
4,569
4,984

#NAME?

<-- =G59*(1+B3)/(B56-B3)

<-- =G72*(1+B3)/(B69-B3)

EXERCISE 5--MODELING DIVIDENDS ON A PER-SHARE BASIS

Sales growth
Current assets/Sales
Current liabilities/Sales
Net fixed assets/Sales
Costs of goods sold/Sales
Depreciation rate
Interest rate on debt
Interest paid on cash and marketable securities
Tax rate
Year 1 dividend per share
Number of shares
Dividend annual growth rate
Year
Income statement
Sales
Costs of goods sold
Interest payments on debt
Interest earned on cash and marketable securities
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings

20%
20%
8%
80%
50%
10%
10.00%
8.00%
40%
0.15
1,000
12%
0

1,000

1,200
(600)
(40)
4
(124)
439
(176)
264
(150)
114

1,440
(720)
(43)
0
(156)
521
(209)
313
(168)
145

1,728
(864)
(51)
(194)
619
(248)
371
(188)
183

Balance sheet
Cash and marketable securities
Current assets
Fixed assets
At cost
Depreciation
Net fixed assets
Total assets

80
200

10
240

288

346

1,100
(300)
800
1,080

1,384
(424)
960
1,210

1,732
(580)
1,152
1,440

2,157
(774)
1,382
1,728

Current liabilities
Debt
Stock
Accumulated retained earnings
Total liabilities and equity

80
400
450
150
1,080

96
400
450
264
1,210

115
466
450
408
1,440

138
548
450
592
1,728

Year
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

264
124
(40)
16
(284)
24

313
156
(48)
19
(348)
26

371
194
(58)
23
(425)
30

Subtract after-tax interest on cash and mkt. securities

Free cash flow

(2)
101

Part b:

Dividend growth rate

0%
2%
4%
6%
8%
10%
12%
14%
16%
18%

(0)
118

0
137

Table: Debt/Equity (book values) ratio as a function of

Year 1
Year 2
Year 3
0.547
0.543
0.526
0.547
0.511
0.445
0.547
0.516
0.457
0.547
0.521
0.470
0.547
0.527
0.484
0.547
0.532
0.497
0.547
0.538
0.512
0.547
0.543
0.526
0.547
0.549
0.542
0.547
0.555
0.557
0.547
0.560
0.574

SHARE BASIS

2,074
(1,037)
(59)
(242)
736
(294)
442
(211)
231

2,488
(1,244)
(68)
(299)
877
(351)
526
(236)
290

415

498

2,675
(1,016)
1,659
2,074

3,306
(1,315)
1,991
2,488

166
635
450
822
2,074

199
727
450
1,113
2,488

442
242
(69)
28
(518)
36

526
299
(83)
33
(631)
41

#NAME?

0
159

0
186

book values) ratio as a function of dividend growth rate

Year 4
Year 5
0.499
0.465
#NAME?
0.365
0.283
0.384
0.308
0.405
0.334
0.426
0.363
0.449
0.394
0.474
0.428
0.499
0.465
0.527
0.506
0.556
0.550
0.587
0.599

EXERCISE 6--minimum cash balances

Sales growth
Current assets/Sales
Current liabilities/Sales
Net fixed assets/Sales
Costs of goods sold/Sales
Depreciation rate
Interest rate on debt
Interest paid on cash & marketable securities
Tax rate
Dividend payout ratio
Year
Income statement
Sales
Costs of goods sold
Interest payments on debt
Interest earned on cash & marketable securities
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings

20%
20%
8%
80%
50%
10%
10.00%
8.00%
40%
50%

<-- Increased from 10%

<-- Increased from 15%
<-- Increased from 77%

<-- Increased from 40%

1,000
(500)
(40)
6
(100)
366
(147)
220
(110)
110

1,200
(600)
(40)
4
(124)
440
(176)
264
(132)
132

1,440
(720)
(43)
2
(156)
523
(209)
314
(157)
157

1,728
(864)
(50)
2
(194)
622
(249)
373
(186)
186

Balance sheet
Cash and marketable securities
Current assets
Fixed assets
At cost
Depreciation
Net fixed assets
Total assets

80
200

28
240

25
288

25
346

1,100
(300)
800
1,080

1,384
(424)
960
1,228

1,732
(580)
1,152
1,465

2,157
(774)
1,382
1,753

Current liabilities
Debt
Stock
Accumulated retained earnings
Total liabilities and equity

80
400
450
150
1,080

96
400
450
282
1,228

115
461
450
439
1,465

138
539
450
625
1,753

Year
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 & mkt. securities
Free cash flow

264
124
(40)
16
(284)
24
(3)
101

314
156
(48)
19
(348)
26
(1)
118

373
194
(58)
23
(425)
30
(1)
137

2,074
(1,037)
(59)
2
(242)
738
(295)
443
(222)
222

2,488
(1,244)
(69)
2
(299)
878
(351)
527
(263)
263

25
415

25
498

2,675
(1,016)
1,659
2,099

3,306
(1,315)
1,991
2,513

166
636
450
847
2,099

199
754
450
1,110
2,513

443
242
(69)
28
(518)
35
(1)
159

527
299
(83)
33
(631)
42
(1)
186

#NAME?

#NAME?

EXERCISE 7--TERMINAL VALUE = DEBT + EQUITY AT BOOK VALUE

Sales growth
Current assets/Sales
Current liabilities/Sales
Net fixed assets/Sales
Costs of goods sold/Sales
Depreciation rate
Interest rate on debt
Interest paid on cash & marketable securities
Tax rate
Dividend payout ratio
Year
Income statement
Sales
Costs of goods sold
Interest payments on debt
Interest earned on cash & marketable securities
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings

10%
15%
8%
77%
50%
10%
10.00%
8.00%
40%
40%
0

1,000
(500)
(32)
6
(100)
374
(150)
225
(90)
135

1,100
(550)
(32)
9
(117)
410
(164)
246
(98)
148

1,210
(605)
(32)
14
(137)
450
(180)
270
(108)
162

1,331
(666)
(32)
20
(161)
492
(197)
295
(118)
177

Balance sheet
Cash and marketable securities
Current assets
Fixed assets
At cost
Depreciation
Net fixed assets
Total assets

80
150

144
165

213
182

289
200

1,070
(300)
770
1,000

1,264
(417)
847
1,156

1,486
(554)
932
1,326

1,740
(715)
1,025
1,513

Current liabilities
Debt
Stock
Accumulated retained earnings
Total liabilities and equity

80
320
450
150
1,000

88
320
450
298
1,156

97
320
450
460
1,326

106
320
450
637
1,513

Year
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 & mkt. securities
Free cash flow

246
117
(15)
8
(194)
19
(5)
176

270
137
(17)
9
(222)
19
(9)
188

295
161
(18)
10
(254)
19
(12)
201

Valuing the firm

Weighted average cost of capital
Year
FCF
Terminal value
Total
NPV of row 61
Add in initial (year 0) cash and mkt. securities
Enterprise value
Subtract out value of firm's debt today
Equity value

20%
0

176

188

201

176

188

201

1,317 #NAME?
80
1,397
-320
1,077

Cash and marketable securities as negative debt

NPV of row 61 = enterprise value
Net year 0 debt
Equity value

1,317
-240 #NAME?
1,077

Valuing the firm--using mid-year discounting

Weighted average cost of capital
Year
FCF
Terminal value
Total
NPV of row 81
Add in initial (year 0) cash and mkt. securities
Enterprise value
Subtract out value of firm's debt today
Equity value

20%
0

176

188

201

176

188

201

1,580 <-- =NPV(B76,C81:G81)*(1+B76)

80
1,660
-320
1,340

Growth
0%
2%
4%
6%
8%
10%
12%
14%
16%

1,340 #NAME?
1,028
1,100
1,191
1,306
1,461
1,677
2,002
2,543
3,625

4,000
3,500
3,000
2,500
2,000
1,500
1,000

#NAME?

growth rate of sales

1,340.03
0%
2%
4%
6%
8%
10%
12%
14%
16%

WACC
10%
2,030.04
2,458.87
3,173.58
4,603.01
8,891.30
nmf
nmf
nmf
nmf

12%
1,696.78
1,970.59
2,381.29
3,065.80
4,434.82
8,541.87
nmf
nmf
nmf

14%
1,458.43
1,644.72
1,905.52
2,296.72
2,948.73
4,252.74
8,164.77
nmf
nmf

AT BOOK VALUE

1,464
(732)
(32)
26
(189)
538
(215)
323
(129)
194

1,611
(805)
(32)
33
(220)
587
(235)
352
(141)
211

371
220

459
242

2,031
(904)
1,127
1,718

2,364
(1,124)
1,240
1,941

117
320
450
830
1,718

129
320
450
1,042
1,941

323
189
(20)
11
(291)
19
(16)
214

352
220
(22)
12
(333)
19
(20)
228

5
214

228
1,812
2,040

214

5
214

228
1,812
2,040

214

4,000

#NAME?

#NAME?

Sales Growth and Equity Value

3,500
3,000
2,500
2,000
1,500
1,000

500
0
0%

2%

4%

6%

8%

10% 12% 14% 16%

0%

16%
1,279.41
1,411.68
1,588.03
1,834.92
2,205.27
2,822.51
4,056.99
7,760.42
nmf

2%

4%

18%
1,139.96
1,236.67
1,361.01
1,526.79
1,758.89
2,107.03
2,687.27
3,847.75
7,329.19

6%

8%

10% 12% 14% 16%

20%
1,028.23
1,100.37
1,190.54
1,306.48
1,461.06
1,677.48
2,002.10
2,543.14
3,625.21

22%
936.67
991.18
1,057.80
1,141.07
1,248.14
1,390.90
1,590.76
1,890.55
2,390.21

24%
860.24
901.71
951.47
1,012.28
1,088.30
1,186.04
1,316.36
1,498.80
1,772.47

26%
795.47
827.04
864.35
909.13
963.85
1,032.26
1,120.21
1,237.48
1,401.65

EXERCISE 8--THE EBITDA CALCULATIONS START IN ROW 53

Sales growth
Current assets/Sales
Current liabilities/Sales
Net fixed assets/Sales
Costs of goods sold/Sales
Depreciation rate
Interest rate on debt
Interest paid on cash & marketable securities
Tax rate
Dividend payout ratio
Year
Income statement
Sales
Costs of goods sold
Interest payments on debt
Interest earned on cash & marketable securities
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings

10%
15%
8%
77%
50%
10%
10.00%
8.00%
40%
40%
0

1,000
(500)
(32)
6
(100)
374
(150)
225
(90)
135

1,100
(550)
(32)
9
(117)
410
(164)
246
(98)
148

1,210
(605)
(32)
14
(137)
450
(180)
270
(108)
162

1,331
(666)
(32)
20
(161)
492
(197)
295
(118)
177

Balance sheet
Cash and marketable securities
Current assets
Fixed assets
At cost
Depreciation
Net fixed assets
Total assets

80
150

144
165

213
182

289
200

1,070
(300)
770
1,000

1,264
(417)
847
1,156

1,486
(554)
932
1,326

1,740
(715)
1,025
1,513

Current liabilities
Debt
Stock
Accumulated retained earnings
Total liabilities and equity

80
320
450
150
1,000

88
320
450
298
1,156

97
320
450
460
1,326

106
320
450
637
1,513

Year
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 & mkt. securities
Free cash flow

246
117
(15)
8
(194)
19
(5)
176

270
137
(17)
9
(222)
19
(9)
188

295
161
(18)
10
(254)
19
(12)
201

EBITDA Calculation
Profit before taxes
Add back depreciation
Add back net interest
EBITDA

410
117
23
550

450
137
18
605

492
161
12
666

Valuing the firm

Weighted average cost of capital
EBITDA multiple for terminal value
Year
FCF
Terminal value
Total
NPV of row 68
Add in initial (year 0) cash and mkt. securities
Enterprise value
Subtract out value of firm's debt today
Equity value

20%
6
0

176

188

201

176

188

201

2,530 #NAME?
80
2,610
-320
2,290

Cash and marketable securities as negative debt

NPV of row 61 = enterprise value
Net year 0 debt
Equity value

2,530
-240 #NAME?
2,290

Valuing the firm--using half-year discounting

Weighted average cost of capital (WACC)
EBITDA multiple for terminal value
Year
FCF
Terminal value
Total
NPV of row 89
Add in initial (year 0) cash and mkt. securities
Enterprise value
Subtract out value of firm's debt today
Equity value

20%
6
0

176

188

201

176

188

201

3,036 #NAME?
80
3,116
-320
2,796

growth
6
7
8
9

2,796 #NAME?
2,796
3,185
3,573
3,961

EBITDA Multiple and

8,000

10
11
12
13
14

8,000

4,350
4,738
5,126
5,515
5,903

6,000
4,000
2,000

0
6
#NAME?

Data table of equity value as function of

EBITDA Multiple

2,796
6
7
8
9
10
11
12
13
14

WACC
10%
3,890
4,440
4,990
5,540
6,090
6,640
7,190
7,740
8,290

12%
3,632
4,144
4,656
5,167
5,679
6,191
6,703
7,214
7,726

14%
3,396
3,873
4,350
4,826
5,303
5,780
6,257
6,733
7,210

RT IN ROW 53

1,464
(732)
(32)
26
(189)
538
(215)
323
(129)
194

1,611
(805)
(32)
33
(220)
587
(235)
352
(141)
211

371
220

459
242

2,031
(904)
1,127
1,718

2,364
(1,124)
1,240
1,941

117
320
450
830
1,718

129
320
450
1,042
1,941

323
189
(20)
11
(291)
19
(16)
214

352
220
(22)
12
(333)
19
(20)
228

538
189
6
732

587
220
(1)
805

5
214
214

228
4,832 #NAME?
5,060

5
214
214

228
4,832 #NAME?
5,060

EBITDA Multiple and Equity Value

16%
3,179
3,624
4,069
4,513
4,958
5,403
5,848
6,292
6,737

18%
2,980
3,395
3,811
4,226
4,641
5,057
5,472
5,887
6,303

10

11

20%
2,796
3,185
3,573
3,961
4,350
4,738
5,126
5,515
5,903

12

13

22%
2,627
2,991
3,354
3,718
4,081
4,445
4,808
5,172
5,535

14

24%
2,471
2,811
3,152
3,493
3,833
4,174
4,515
4,855
5,196

26%
2,326
2,646
2,965
3,285
3,604
3,924
4,243
4,563
4,882

PROJECT FINANCE
Sales growth
Current assets/Sales
Current liabilities/Sales
Costs of goods sold/Sales
Depreciation rate
Interest rate on debt
Interest paid on cash & marketable securities
Tax rate
Dividend payout ratio

15%
15%
8%
55%
10%
10.00%
8.00%
40%
0% <-- No dividends until all the debt is paid off

Debt repayment table (essentially a loan table from Chapter 1): The principal amounts are
entered into the balance sheet and the interest is put into the profit and loss statement.
Principal
Debt
Of which:
at begin. payment
Year
of year
at end yr. Interest
1
1,000
263.80
100.00
2
836.20
263.80
83.62
3
656.03
263.80
65.60
4
457.83
263.80
45.78
5
239.82
263.80
23.98

Year
Income statement
Sales
Costs of goods sold
Interest payments on debt
Interest earned on cash & marketable securities
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings

1,150
(633)
(100)
(1)
(211)
206
(82)
124
124

1,323
(727)
(84)
(3)
(233)
276
(110)
166
166

1,521
(836)
(66)
(4)
(257)
358
(143)
215
215

Balance sheet
Cash and marketable securities the plug:
=C39-C28-C32
Current assets
Fixed assets
At cost
Depreciation
=B31-$B$7*(C30+B30)/2
Net fixed assets
Total assets

200

(21)
173

(47)
198

(45)
228

2,000
2,000
2,200

2,211
(211)
2,000
2,152

2,443
(443)
2,000
2,151

2,700
(700)
2,000
2,184

Current liabilities
Debt
Stock
Accumulated retained earnings
Total liabilities and equity

100
1,000
1,100
2,200

92
836
1,100
124
2,152

106
656
1,100
289
2,151

122
458
1,100
504
2,184

RETURN ON EQUITY (ROE)

Year
Equity cash flow
RETURN ON EQUITY (ROE)

Data table: ROE as a function of initial

equity investment

1
124
211
28
(8)
(211)
100
1
244

0
1
-1,100
15.08% #NAME?

2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200

2
166
233
(26)
14
(233)
84
3
240

15.08% #NAME?
11.40%
11.98%
12.70%
13.59%
14.73%
16.27%
18.42%
21.70%
27.37%
40.10%

3
215
257
(30)
16
(257)
66
4
270

ROE

FREE CASH FLOW CALCULATION

Year
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 & mkt. securities
Free cash flow
Note that the cash flow generated by
depreciation equals the increase in fixed
assets at cost.

ROE as a Fun

50%
40%
30%
20%
10%
0%
0

all the debt is paid off

Repaid
principal
163.80
180.18
198.19
218.01
239.82

1,749
(962)
(46)
(2)
(284)
455
(182)
273
273

(5)
262

2,011
(1,106)
(24)
5
(314)
571
(229)
343
343

#NAME?

119
302

2,985
(985)
2,000
2,257

3,299
(1,299)
2,000
2,421

140
240
1,100
777
2,257

161
40
1,100
1,120
2,421

#NAME?

4
273
284
(34)
18
(284)
46
2
305

4
-

5
343
314
(39)
21
(314)
24
(5)
344

5
2,220

#NAME?

ROE as a Function of Initial

Equity Investment

Equity investment

500

1,000

1,500

2,000

PROJECT FINANCE
Uses functions IPMT and PPMT
Sales growth
Current assets/Sales
Current liabilities/Sales
Costs of goods sold/Sales
Depreciation rate
Interest rate on debt
Interest paid on cash & marketable securities
Tax rate
Dividend payout ratio

Year
Income statement
Sales
Costs of goods sold
Interest payments on debt
Interest earned on cash & marketable securities
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings

15%
15%
8%
55%
10%
10.00%
8.00%
40%
0% <-- No dividends until all the debt is paid off

1,150
(633)
(100)
(1)
(211)
206
(82)
124
124

1,323
(727)
(84)
(3)
(233)
276
(110)
166
166

1,521
(836)
(66)
(4)
(257)
358
(143)
215
215

Balance sheet
Cash and marketable securities the plug:
=C39-C28-C32
Current assets
Fixed assets
At cost
Depreciation
=B31-$B$7*(C30+B30)/2
Net fixed assets
Total assets

200

(21)
173

(47)
198

(45)
228

2,000
2,000
2,200

2,211
(211)
2,000
2,152

2,443
(443)
2,000
2,151

2,700
(700)
2,000
2,184

Current liabilities
Debt
Stock
Accumulated retained earnings
Total liabilities and equity

100
1,000
1,100
2,200

92
836
1,100
124
2,152

106
656
1,100
289
2,151

122
458
1,100
504
2,184

FREE CASH FLOW CALCULATION

Year
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

1
124
211
28
(8)
(211)
100

2
166
233
(26)
14
(233)
84

3
215
257
(30)
16
(257)
66

RETURN ON EQUITY (ROE)

Year
Equity cash flow
RETURN ON EQUITY (ROE)

Data table: ROE as a function of initial

equity investment

1
244

0
1
-1,100
15.07% #NAME?

2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200

3
240

15.07% #NAME?
11.40%
11.98%
12.70%
13.59%
14.73%
16.27%
18.42%
21.70%
27.37%
40.10%

4
270

ROE

Subtract after-tax interest on cash & mkt. securities

Free cash flow
Note that the cash flow generated by
depreciation equals the increase in fixed
assets at cost.

50%
40%
30%
20%
10%
0%
0

all the debt is paid off

1,749
(962)
(46)
(2)
(284)
455
(182)
273
273

(5)
262

2,011
(1,106)
(24)
3
(314)
570
(228)
342
342

78
302

2,985
(985)
2,000
2,257

3,299
(1,299)
2,000
2,380

140
240
1,100
777
2,257

161
1,100
1,119
2,380

4
273
284
(34)
18
(284)
46

#NAME?

5
342
314
(39)
21
(314)
24

#NAME?

2
305

4
-

(3)
345

5
2,219

#NAME?

ROE as a Function of Initial

Equity Investment

Equity investment

500

1,000

1,500

2,000

A
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38

SUSTAINABLE DIVIDENDS--Template
Sales growth
Current assets/Sales
Current liabilities/Sales
Net fixed assets/Sales
Costs of goods sold/Sales
Depreciation rate
Interest rate on debt
Interest paid on cash & marketable securities
Tax rate
Year
Income statement
Sales
Costs of goods sold
Interest payments on debt
Interest earned on cash & marketable securities
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings

10%
15%
8%
77%
50%
10%
10.00%
8.00%
40%
0

1,000
(500)
(32)
6
(100)
374
(150)
225
(90)
135

Balance sheet
Cash and marketable securities
Current assets
Fixed assets
At cost
Depreciation
Net fixed assets
Total assets

1,070
(300)
770
1,000

Current liabilities
Debt
Stock
Accumulated retained earnings
Total liabilities and equity

80
320
450
150
1,000

80
150

80

80

80

320
450

320
450

320
450

plate

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38

80

80

320
450

320
450

SUSTAINABLE DIVIDENDS--SOLUTION
Sales growth
Current assets/Sales
Current liabilities/Sales
Net fixed assets/Sales
Costs of goods sold/Sales
Depreciation rate
Interest rate on debt
Interest paid on cash & marketable securities
Tax rate

10%
15%
8%
77%
50%
10%
10.00%
8.00%
40%

Year
Income statement
Sales
Costs of goods sold
Interest payments on debt
Interest earned on cash & marketable securities
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings

1,000
(500)
(32)
6
(100)
374
(150)
225
(90)
135

1,100
(550)
(32)
6
(117)
408
(163)
245
(161)
84

1,210
(605)
(32)
6
(137)
442
(177)
265
(173)
92

1,331
(666)
(32)
6
(161)
479
(191)
287
(186)
102

Balance sheet
Cash and marketable securities
Current assets
Fixed assets
At cost
Depreciation
Net fixed assets
Total assets

80
150

80
165

80
182

80
200

1,070
(300)
770
1,000

1,264
(417)
847
1,092

1,486
(554)
932
1,193

1,740
(715)
1,025
1,305

Current liabilities
Debt
Stock
Accumulated retained earnings
Total liabilities and equity

80
320
450
150
1,000

88
320
450
234
1,092

97
320
450
326
1,193

106
320
450
428
1,305

245
84
161

265
92
173

287
102
186

CALCULATION OF MAXIMUM SUSTAINABLE DIVIDEND

Dividends
Profit after tax
- increase in retained earnings
==> maximum sustainable dividend
Year
Free cash flow calculation
Profit after tax
Add back depreciation
Subtract increase in current assets
Add back increase in current liabilities

2
245
117
(15)
8

3
265
137
(17)
9

287
161
(18)
10

Subtract increase in fixed assets at cost

Add back after-tax interest on debt
Subtract after-tax interest on cash & mkt. securities
Free cash flow

(194)
19
(4)
176

(222)
19
(4)
188

(254)
19
(4)
201

1,464
(732)
(32)
6
(189)
518
(207)
311
(199)
112

1,611
(805)
(32)
6
(220)
560
(224)
336
(213) <-- Dividends are calculated in row 41 and following
123

80
220

80
242

2,031
(904)
1,127
1,427

2,364
(1,124)
1,240
1,562

117
320
450
540
1,427

129
320
450
663
1,562

311
112
199

336
123
213

5
311
189
(20)
11

336
220
(22)
12

(291)
19
(4)
214

(333)
19
(4)
228