FM S 2012 HW5 Solution

FIRST FINANCIAL MODEL
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 BALANC

Cash flow from operating activities
Profit after tax
246
270
295

Adjust for changes in net working capital:
Net cash from operating activities
117
137
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
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
<-<-<-<-<-<-<-<-<-<--
=F15*(1+$B$2)
=-G15*$B$6
=-$B$8*(F36+G36)/2
=$B$9*(F27+G27)/2
=-$B$7*(G30+F30)/2
=SUM(G15:G19)
=-G20*$B$10
=G21+G20
=-$B$11*G22
=G23+G22
<-- =G39-G28-G32
<-- =G15*$B$3
2,031
(904)
1,127
1,718
2,364
(1,124)
1,240
1,941
<-<-<-<--
=G32-G31
=F31+G19
=G15*$B$5
=G32+G28+G27
117
320
450
830
1,718
129
320
450
1,042
1,941
<-<-<-<-<--
=G15*$B$4
=F36
=F37
=F38+G24
=SUM(G35:G38)
5
<-<-<-<-<-<-<-<--
=G22
=-G19
=-(G28-F28)
=G35-F35
=-(G30-F30)
=-(1-$B$10)*G17
=-(1-$B$10)*G18
=SUM(G44:G50)
323
189
(20)
11
(291)
19
(16)
214
352
220
(22)
12
(333)
19
(20)
228
WS: RECONCILING THE CASH BALANCES

323
352
<-- =G22
189
220
<-- =-G19
(20)
11
502
(22) <-- =-(G28-F28)

12 <-- =G35-F35
562 <-- =SUM(G55:G59)
(291)
0
0
(291)
(333)
0
0
(333)
<-- =-(G30-F30)
<-- Not in our model
<-- =SUM(G63:G65)
0
0
(129)
(129)
0
0
(141)
(141)
<-<-<-<--
82
82
88
88
=G36-F36
=G37-F37
=G23
=SUM(G69:G71)
<-- =G72+G66+G60
<-- =G27-F27
FIRST FINANCIAL MODEL

Here's a basic exercise that will help you understand what's going on in the modeling of financial statements.
Replicate the models in sections 3.2, 3.7, and 3.8 (First Financial Model). That is, enter the correct formulas
for the cells and see that you get the same results as the book. (This turns out to be more of an exercise in
accounting than in finance. If you're like many financial modelers, you'll see that there are some aspects of
accounting that you've forgotten!)
Sales growth
10%
15%
8%
77%
50%
Depreciation rate
10%
10.00%
Interest paid on cash and marketable securities8.00%
Tax rate
40%
40%
Year
0
Income statement
Sales
1,000
Costs of goods sold
(770)
49
Interest earned on cash and marketable securities 8
Depreciation
(100)
Profit before tax
187
Taxes
(15)
Profit after tax
172
Dividends
(69)
Retained earnings
103
1,000
(770)
49
9
(253)
35
(3)
32
(13)
19
1,000
(770)
49
6
(422)
(137)
11
(126)
50
(76)
1,000
(770)
49
(10)
(704)
(434)
35
(400)
160
(240)
1,000
(770)
49
(48)
(1,173)
(941)
75
(866)
346
(520)
1,000
(770)
49
(123)
(1,955)
(1,799)
144
(1,655)
662
(993)
(216)
100
(736)
100
(1,729)
100
Balance sheet
Current assets
Fixed assets
At cost
Depreciation
Net fixed assets
Total assets
80
100
99
100
23
100
380
(300)
80
260
633
(553)
80
279
1,056
(976)
80
203
1,759
(1,679)
80
(36)
2,932
(2,852)
80
(556)
4,887
(4,807)
80
(1,549)
Current liabilities
Debt
Stock
150
(490)
450
150
260
150
(490)
450
169
279
150
(490)
450
93
203
150
(490)
450
(146)
(36)
150
(490)
450
(666)
(556)
150
(490)
450
(1,659)
(1,549)
Year
Profit after tax
2
32
(126)
3
(400)
4
(866)
5
(1655)

253
0
0
(253)
(45)
Subtract after-tax interest on cash and+A14 mkt. securities (8)
Free cash flow
(21)
422
0
0
(422)
(45)
(6)
(177)
704
0
0
(704)
(45)
9
(436)
1173
0
0
(1173)
(45)
44
(867)
1955
0
0
(1955)
(45)
113
(1587)
CONSOLIDATED STATEMENT OF CASH FLOWS: RECONCILING THE CASH BALANCES

Cash flow from operating activities
Profit after tax
Adjust for changes in net working capital:
Net cash from operating activities
32
253
(126)
422
(400)
704
(866)
1,173
285
296
304
307
(253)
0
0
(253)
(422)
0
0
(422)
(704)
0
0
(704)
(1,173)
0
0
(1,173)
(1,955)
0
0
(1,955)
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
(13)
(13)
0
0
50
50
0
0
160
160
0
0
346
346
0
0
662
662
Net increase in cash and cash equivalents

Check: changes in cash and mkt. securities
19
19
(76)
(76)
(240)
(240)
(520)
(520)
(993)
(993)
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
(1,655)
1,955
300
<-<-<-<-<-<-<-<-<-<--
=F16*(1+$B$2)
=-G16*$B$6
=-$B$8*(F37+G37)/2
=$B$9*(F28+G28)/2
=-$B$7*(G31+F31)/2
=SUM(G16:G20)
=-G21*$B$10
=G22+G21
=-$B$11*G23
=G24+G23
<-- =G40-G29-G33
<-- =G16*$B$3
<-<-<-<--
=G33-G32
=F32+G20
=G16*$B$5
=G33+G29+G28
<-<-<-<-<--
=G16*$B$4
=F37
=F38
=F39+G25
=SUM(G36:G39)
<-- =G23
<-<-<-<-<-<-<--
=-G20
=-(G29-F29)
=G36-F36
=-(G31-F31)
=-(1-$B$10)*G18
=-(1-$B$10)*G19
=SUM(G45:G51)
ASH BALANCES
<-- =G23
<-- =-G20
<-- =-(G29-F29)
<-- =G36-F36
<-- =SUM(G56:G60)
<-- =-(G31-F31)
<-- =SUM(G64:G66)
<-<-<-<--
=G37-F37
=G38-F38
=G24
=SUM(G70:G72)
<-- =G73+G67+G61
<-- =G28-F28
EXERCISE 2
Sales growth
Sales, general and administrative expenses
Depreciation rate
Interest paid on cash & marketable securities
Tax rate
Year
Income statement
Sales
Costs of goods sold
SG&A
Interest earned on cash & marketable securities
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings
The model of section 3.2 includes cost of goods sold but not selling, general,
and administrative (SG&A) expenses. Suppose that the firm has $200 of
these expenses each year, irrespective of the level of sales. a. Change the
model to accommodate this new assumption. Show the resulting profit and
loss statements, balance sheets, free cash flows, and valuation. b. Create a
data table in which you show the sensitivity of the equity value to the level
of SG&A. Let SG&A vary from 0 to $500 per year.
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
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
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
Profit after tax

Subtract after-tax interest on cash & mkt. securities
Free cash flow
124
117
(15)
8
(194)
19
(4)
56
145
137
(17)
9
(222)
19
(3)
68
166
161
(18)
10
(254)
19
(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
Enterprise value
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
610 <-- =B88, data table header

1,677
1,411
Effect of SG&A on
1,144
877
2,000
610
1,500
343
1,000
Equit
Data table: Value as function

of SG&A and sales growth
77
-190
-457
-724
-991
-1,257
-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
Value
300
350
400
450
500
550
600
1,500
1,000
500
0
-500 0
-1,000
-1,500
-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
t of goods sold but not selling, general,

. Suppose that the firm has $200 of
of the level of sales. a. Change the
mption. Show the resulting profit and
ash flows, and valuation. b. Create a
itivity of the equity value to the level
$500 per year.
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
(3)
94
215
220
(22)
12
(333)
19
(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
data table header
Effect of SG&A on Equity Value
100
200
300
400
500
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
600
EXERCISE 3
The model of section 3.2 includes cost of goods sold but not selling, general, a
(SG&A) expenses. Suppose that the firm has $200 of these expenses each yea
level of sales. a. Change the model to accommodate this new assumption. Sho
and loss statements, balance sheets, free cash flows, and valuation. b. Create a
show the sensitivity of the equity value to the level of SG&A. Let SG&A vary
year.
Sales growth
Fixed assets at cost/Sales
Depreciation rate
Tax rate
10%
15%
8%
100%
50%
10%
10.00%
8.00%
40%
40%
Year
Income statement
Sales
Costs of goods sold
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)
(18)
(109)
392
(157)
235
(94)
141
1,210
(605)
(32)
(45)
(116)
412
(165)
247
(99)
148
Balance sheet
Current assets
Fixed assets
At cost
Depreciation
Net fixed assets
Total assets
80
150
(524)
165
(609)
182
1,070
(300)
770
1,000
1,100
(409)
1,509
1,149
1,210
(524)
1,734
1,306
Current liabilities
Debt
Stock
80
320
450
150
1,000
88
320
450
291
1,149
97
320
450
439
1,306
Year
Profit after tax
2
235
109
247
116

Free cash flow
(15)
8
(30)
19
11
336
(17)
9
(110)
19
27
292
Valuing the firm

Year
FCF
Terminal value
Total
20%
0
NPV of row 61
Enterprise value
Equity value
2
336
292
336
292
2,710 <-- =NPV(B55,C60:G60)

80
2,790
-320
2,470

Net year 0 debt
Equity value
2,710
-240 <-- =-B36+B27
2,470
Valuing the firm--using half-year discounting

Year
FCF
Terminal value
Total
NPV of row 81
Enterprise value
Equity value
20%
0
2
336
292
336
292
3,251 <-- =NPV(B75,C80:G80)*(1+B75)

80
3,331
-320
3,011
Growth
0%
2%
4%
6%
8%
10%
3,011 <-- =B86

1,871
1,998
2,156
2,360
2,631
3,011
12%
14%
16%
3,581
4,531
6,431
<-- =IF(B75<=B2,"nmf",B86)
WACC
growth rate of sales
3,011.40
0%
2%
4%
6%
8%
10%
12%
14%
16%
10%
3,571.40
4,300.15
5,514.73
7,943.90
15,231.40
nmf
nmf
nmf
nmf
12%
3,004.73
3,471.40
4,171.40
5,338.07
7,671.40
14,671.40
nmf
nmf
nmf
of goods sold but not selling, general, and administrative

m has $200 of these expenses each year, irrespective of the
ccommodate this new assumption. Show the resulting profit
cash flows, and valuation. b. Create a data table in which you
to the level of SG&A. Let SG&A vary from 0 to $500 per
1,331
(666)
(32)
(52)
(127)
454
(182)
272
(109)
163
1,464
(732)
(32)
(60)
(140)
500
(200)
300
(120)
180
1,611
(805)
(32)
(69)
(154)
551
(220)
330
(132)
198
(702)
200
(805)
220
(917)
242
1,331
(651)
1,982
1,479
1,464
(791)
2,255
1,670
1,611
(945)
2,555
1,880
106
320
450
603
1,479
117
320
450
783
1,670
129
320
450
981
1,880
4
272
127
5
300
140
330
154
(18)
10
(121)
19
31
321
(20)
11
(133)
19
36
353
321
353
321
353
(22)
12
(146)
19
41
388
388
4,268 <-- =G58*(1+B2)/(B55-B2)
4,656
321
353
321
353
388
4,268 <-- =G78*(1+B2)/(B75-B2)
4,656
G80)*(1+B75)
Sales Growth and Equity Value

8,000
6,000
4,000
2,000
2,000
0
0%
5%
14%
16%
2,599.97
2,296.40
2,918.90
2,524.26
3,365.40
2,828.07
4,035.15
3,253.40
5,151.40
3,891.40
7,383.90
4,954.73
14,081.40
7,081.40
nmf
13,461.40
nmf
nmf
10%
18%
2,060.29
2,228.28
2,444.26
2,732.23
3,135.40
3,740.15
4,748.07
6,763.90
12,811.40
15%
20%
1,871.40
1,998.07
2,156.40
2,359.97
2,631.40
3,011.40
3,581.40
4,531.40
6,431.40
22%
1,716.85
1,813.90
1,932.51
2,080.78
2,271.40
2,525.57
2,881.40
3,415.15
4,304.73
20%
24%
1,588.07
1,663.22
1,753.40
1,863.62
2,001.40
2,178.54
2,414.73
2,745.40
3,241.40
26%
1,479.09
1,537.65
1,606.85
1,689.90
1,791.40
1,918.28
2,081.40
2,298.90
2,603.40
EXERCISE 4--ASSETS AT COST

GIVEN BY A STEP FUNCTION
Sales growth
Depreciation rate
Tax rate
Year
Income statement
Sales
Costs of goods sold
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings
Referring again to the model of section 3.2, suppose that the fixed
the following step
function:
Incorporate this function into the model.
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
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
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
Profit after tax
255
109
(15)
293
115
(17)
332
126
(18)

Free cash flow
8
(30)
19
(9)
336
9
(109)
19
(19)
292
10
(109)
19
(28)
332
Valuing the firm

Year
FCF
Terminal value
Total
NPV of row 61
Enterprise value
Equity value
20%
0
336
292
332
336
292
332
2,858 <-- =NPV(B56,C61:G61)

80
2,938
-320
2,618

Net year 0 debt
Equity value
2,858
-240 <-- =-B37+B28
2,618

Year
FCF
Terminal value
Total
NPV of row 81
Enterprise value
Equity value
20%
0
336
292
332
336
292
332
3,430 <-- =NPV(B76,C81:G81)*(1+B76)

80
3,510
-320
3,190
section 3.2, suppose that the fixed assets at cost follow

the following step
function:
rate this function into the model.
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 <-- =IF(G14<=1200,G14,IF(G14<=1400,1200+0.9*(G14-1200),1380+0.8*(G14-1400)))

(937)
612
2,058
117
320
450
904
1,791
129
320
450
1,160
2,058
5
376
137
(20)
426
149
(22)
11
(113)
19
(39)
372
12
(117)
19
(51)
415
5
372
372
415
4,569 <-- =G59*(1+B3)/(B56-B3)
4,984
5
372
372
415
4,569 <-- =G72*(1+B3)/(B69-B3)
4,984
+0.8*(G14-1400)))
EXERCISE 5--MODELING DIVIDENDS ON A PER-SHARE BASIS

Sales growth
Depreciation rate
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 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%
0.25
1,200
16%
0
1,000
1,200
(600)
(47)
3
(124)
432
(173)
259
(300)
(41)
1,440
(720)
(68)
(156)
496
(198)
298
(348)
(50)
1,728
(864)
(98)
(194)
572
(229)
343
(404)
(61)
Balance sheet
Current assets
Fixed assets
At cost
Depreciation
Net fixed assets
Total assets
80
200
240
288
346
1,100
(300)
800
1,080
1,384
(424)
960
1,200
1,732
(580)
1,152
1,440
2,157
(774)
1,382
1,728
Current liabilities
Debt
Stock
80
400
450
150
1,080
96
545
450
109
1,200
115
816
450
59
1,440
138
1,142
450
(2)
1,728
Year
Profit after tax
259
124
(40)
16
(284)
28
298
156
(48)
19
(348)
41
343
194
(58)
23
(425)
59
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
0.975
1.604
2.548
0.975
1.373
1.617
0.975
1.400
1.702
0.975
1.427
1.793
0.975
1.455
1.893
0.975
1.483
2.001
0.975
1.512
2.119
0.975
1.542
2.248
0.975
1.573
2.391
0.975
1.604
2.548
0.975
1.636
2.723
5. Consider the model in section 3.7 (where debt is the plug).

a. Suppose that the firm has 1200 shares and that it decides
to pay, in year 1, a dividend per share of 25 cents. In
addition, suppose that it wants this dividend per share to
grow in subsequent years by 16 percent per year.
Incorporate these changes into the pro forma model. b. Do a
sensitivity analysis in which you show the effect on the
debt/equity ratio of the nnual growth rate of dividends. Vary
this rate from 0 percent to 18 percent, in steps of 2 percent.
For this exercise, define debt as net debt (i.e., debt minus
cash and marketable securities).
SHARE BASIS
2,074
(1,037)
(134)
(242)
662
(265)
397
(468)
(71)
2,488
(1,244)
(176)
(299)
769
(308)
461
(543) <-- =-$B$12*$B$11*(1+$B$13)^(G15-1)
(82)
415
498
2,675
(1,016)
1,659
2,074
3,306
(1,315)
1,991
2,488
166
1,531
450
(73)
2,074
199
1,994
450
(155)
2,488
397
242
(69)
28
(518)
80
461
299
(83)
33
(631)
106
0
159
0
186
book values) ratio as a function of dividend growth rate

Year 4
Year 5
4.064
6.764 <-- =(G38-G29)/(G39+G40), data table header
1.651
1.517
1.804
1.717
1.980
1.963
2.185
2.269
2.427
2.662
2.717
3.185
3.069
3.912
3.506
4.993
4.064
6.764
4.799
10.194
EXERCISE 7--TERMINAL VALUE = DEBT + EQUITY AT BOOK VALUE

Sales growth
Depreciation rate
Tax rate
Year
Income statement
Sales
Costs of goods sold
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
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
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
Profit after tax
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

Year
FCF
Terminal value
Total
NPV of row 61
Enterprise value
Equity value
20%
0
176
188
201
176
188
201
1,317 <-- =NPV(B55,C60:G60)

80
1,397
-320
1,077

Net year 0 debt
Equity value
1,317
-240 <-- =-B36+B27
1,077
Valuing the firm--using mid-year discounting

Year
FCF
Terminal value
Total
NPV of row 81
Enterprise value
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 <-- =B86

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
Cell B106 contains formula <-- =IF(B75<=B2,"nmf",B86)
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
In the valuation exercise of section

3.4, the terminal value is calculated
using a Gordon dividend model on the
cash flows. Replace this terminal value
by the year-5 book value of debt plus
equity. In making this change, you are
essentially assuming that the book
value correctly predicts the market
value.7. In the valuation exercise of
section 3.4, the terminal value is
calculated using a Gordon dividend
model on the cash flows. Replace this
terminal value by the year-5 book
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 <-- =SUM(G36:G38)
2,040
214
5
214
228
1,812 <-- =SUM(G36:G38)
2,040
214
4,000 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%
6%
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
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
Depreciation rate
Tax rate
Year
Income statement
Sales
Costs of goods sold
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
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
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
Profit after tax
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 net interest
EBITDA
410
117
23
550
450
137
18
605
492
161
12
666
Valuing the firm

EBITDA multiple for terminal value
Year
FCF
Terminal value
Total
NPV of row 68
Enterprise value
Equity value
20%
6
0
176
188
201
176
188
201
2,530 <-- =NPV(B61,C67:G67)

80
2,610
-320
2,290

Net year 0 debt
Equity value
2,530
-240 <-- =-B36+B27
2,290

Weighted average cost of capital (WACC)
EBITDA multiple for terminal value
Year
FCF
Terminal value
Total
NPV of row 89
Enterprise value
Equity value
20%
6
0
176
188
201
176
188
201
3,036 <-- =NPV(B82,C88:G88)*(1+B82)

80
3,116
-320
2,796
growth
6
7
8
9
2,796 <-- =B94

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
Cell B114 contains formula <-- =B94
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
8. Repeat exercise 7, but this time replace

the terminal value by an EBITDA ratio times
year-5 anticipated
EBITDA. Show a graph of the equity value of
the firm as a function of the assumed year-5
EBITDA ratio,
varying this ratio from 6 to 14.
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 <-- =G57*B62
5,060
5
214
214
228
4,832 <-- =B83*G57
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
EXERCISE 9
PROJECT FINANCE
Sales growth
Depreciation rate
Tax rate
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
200
52.76
20.00
2
167.24
52.76
16.72
3
131.21
52.76
13.12
4
91.57
52.76
9.16
5
47.96
52.76
4.80
Year
Income statement
Sales
Costs of goods sold
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings
1,150
(633)
(20)
(26)
(211)
261
(104)
156
156
1,323
(727)
(17)
(47)
(233)
298
(119)
179
179
1,521
(836)
(13)
(35)
(257)
379
(152)
227
227
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
(657)
173
(526)
198
(352)
228
2,000
2,000
2,200
2,211
(211)
2,000
1,516
2,443
(443)
2,000
1,672
2,700
(700)
2,000
1,876
Current liabilities
Debt
Stock
100
200
1,100
1,400
92
167
1,100
156
1,516
106
131
1,100
335
1,672
122
92
1,100
563
1,876
RETURN ON EQUITY (ROE)

Year
Equity cash flow
Data table: ROE as a function of initial

equity investment
1
156
211
28
(8)
(211)
20
26
222
2
179
233
(26)
14
(233)
17
47
231
3
227
257
(30)
16
(257)
13
35
262
0
1
2
-1,100
15.90% <-- =IRR(B70:G70)
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
3
-
15.90% <-- =B71

11.31%
11.98%
45%
12.79%
40%
13.81%
35%
15.10%
16.82%
30%
19.23%
25%
22.86%
29.04%
42.69%
ROE
FREE CASH FLOW CALCULATION

Year
Profit after tax
Free cash flow
Note that the cash flow generated by
depreciation equals the increase in fixed
assets at cost.
ROE as a Function
20%
15%
10%
5%
0%
0
In the project finance pro forma of section 3.9 it is

assumed that the firm pays off its initial debt of
1,000 in equal installments of principal over five
years. Change this assumption and assume
instead that the firm pays off its debt in equal
payments of interest and principal over five years.
all the debt is paid off
Repaid
principal
32.76
36.04
39.64
43.60
47.96
4
1,749
(962)
(9)
(19)
(284)
474
(190)
285
285
(127)
262
2,985
(985)
2,000
2,135
140
48
1,100
848
2,135
5
2,011
(1,106)
(5) <-- {=-TRANSPOSE(E17:E21)}
2
(314)
588
(235)
353
353
167
302
3,299
(1,299)
2,000
2,469
161
8 <-- =F47-$B$47/5
1,100
1,200
2,469
4
285
284
(34)
18
(284)
9
19
297
4
-
5
353
314
(39)
21
(314)
5
(2)
337
5
2,300 <-- =G34+G48+G49
ROE as a Function of Initial

Equity Investment
Equity investment
500
1,000
1,500
2,000
EXERCISE 10 PROJECT FINANCE

Uses functions IPMT and PPMT
Sales growth
Depreciation rate
Tax rate
Year
Income statement
Sales
Costs of goods sold
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
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
1
124
211
28
(8)
(211)
100
2
166
233
(26)
14
(233)
84
3
215
257
(30)
16
(257)
66

Free cash flow
Note that the cash flow generated by
depreciation equals the increase in fixed
assets at cost.
Data table: ROE as a function of initial

equity investment
3
240
4
270
0
1
2
-1,100
15.07% <-- =IRR(B59:G59)
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
15.07% <-- =B60

10.78%
11.40%
12.16%
13.11%
14.32%
15.94%
18.21%
21.65%
27.54%
40.67%
ROE

Year
Equity cash flow
1
244
3
-
50%
40%
30%
20%
10%
0%
0
In the project finance pro forma of section

3.9 it is assumed that the firm pays off its
initial debt of 1,000 in equal installments
of principal over five years. Change this
assumption and assume instead that the
firm pays off its debt in equal payments of
interest and principal over five years. Hint:
You have to use the PMT function to find
the annual payments; then set up a loan
table (as in Chapter 1) to split the annual
payments into an interest and repayment
of principal.
all the debt is paid off
1,749
(962)
(46)
(2)
(284)
455
(182)
273
273
(5)
262
2,011
(1,106)
(24) <-- =IPMT($B$7,G13,5,1000)
3
(314)
570
(228)
342
342
78
302
2,985
(985)
2,000
2,257
3,299
(1,299)
2,000
2,380
140
240
1,100
777
2,257
161
1,100
1,119
2,380
4
273
284
(34)
18
(284)
46
5
342
314
(39)
21
(314)
24
<-- =F36-PPMT($B$7,G13,5,-1000,0)
2
305
4
-
(3)
345
5
2,219 <-- =G23+G37+G38
ROE as a Function of Initial

Equity Investment
Equity investment
500
1,000
1,500
2,000

FM S 2012 HW5 Solution

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FIRST FINANCIAL MODEL

CONSOLIDATED STATEMENT OF CASH FLOWS: RECONCILING THE CASH BALANC

Add back depreciation

Cash flow from financing activities

Net increase in cash and cash equivalents

Cash flow from investing activities

WS: RECONCILING THE CASH BALANCES

(22) <-- =-(G28-F28)

FIRST FINANCIAL MODEL

Add back depreciation

CONSOLIDATED STATEMENT OF CASH FLOWS: RECONCILING THE CASH BALANCES

Cash flow from financing activities

Net increase in cash and cash equivalents

Cash flow from investing activities

Profit after tax

Valuing the firm

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

Cash and marketable securities as negative debt

Valuing the firm--using mid-year discounting

Data table: Value as function

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

610 <-- =B88, data table header

Data table: Value as function

t of goods sold but not selling, general,

data table header

Effect of SG&A on Equity Value

Subtract increase in current assets

Valuing the firm

2,710 <-- =NPV(B55,C60:G60)

Cash and marketable securities as negative debt

Valuing the firm--using half-year discounting

3,251 <-- =NPV(B75,C80:G80)*(1+B75)

3,011 <-- =B86

growth rate of sales

of goods sold but not selling, general, and administrative

Sales Growth and Equity Value

EXERCISE 4--ASSETS AT COST

Add back increase in current liabilities

Valuing the firm

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

Cash and marketable securities as negative debt

Valuing the firm--using half-year discounting

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

section 3.2, suppose that the fixed assets at cost follow

1,548 <-- =IF(G14<=1200,G14,IF(G14<=1400,1200+0.9*(G14-1200),1380+0.8*(G14-1400)))

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

Subtract after-tax interest on cash and mkt. securities

Dividend growth rate

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

5. Consider the model in section 3.7 (where debt is the plug).

book values) ratio as a function of dividend growth rate

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

Valuing the firm

1,317 <-- =NPV(B55,C60:G60)

Cash and marketable securities as negative debt

Valuing the firm--using mid-year discounting

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

1,340 <-- =B86

Cell B106 contains formula <-- =IF(B75<=B2,"nmf",B86)

growth rate of sales

In the valuation exercise of section

Growth and Equity Value

10% 12% 14% 16%

10% 12% 14% 16%

1,548 <-- =IF(G14<=1200,G14,IF(G14<=1400,1200+0.9(G14-1200),1380+0.8(G14-1400)))