Professional Documents
Culture Documents
Year 0 1
Income statement
Sales 1,000
Costs of goods sold
Interest payments on debt
Interest earned on cash and marketable securities
Depreciation
Profit before tax
Taxes
Profit after tax
Dividends
Additions to: Retained earnings
Balance sheet
Cash and marketable securities 80
Current assets
Fixed assets
At cost
Depreciation (300)
Net fixed assets
Total assets
Current liabilities
Debt
Stock 450
Accumulated retained earnings 150
Total liabilities and equity 600
Given
FIRST FINANCIAL 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%
Year 0 1 2 3 4
Income statement
Sales 1,000
Costs of goods sold
Interest payments on debt
Interest earned on cash and marketable securities
Depreciation (100)
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings
Balance sheet
Cash and marketable securities 80
Current assets
Fixed assets
At cost
Depreciation (300)
Net fixed assets
Total assets
Current liabilities
Debt
Stock 450
Accumulated retained earnings 150
Total liabilities and equity
Year 0 1 2 3 4
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
5
G THE CASH BALANCES
-
-
-
-
-
-
0
0
-
0
0
-
0
0
-
FIRST FINANCIAL 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%
Year 0 1 2 3
Income statement
Sales 1,000
Costs of goods sold (500)
Interest payments on debt (32)
Interest earned on cash and marketable securities 6
Depreciation (100)
Profit before tax 374
Taxes (150)
Profit after tax 225
Dividends (90)
Retained earnings 135
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
Year 0 1 2 3
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 mkt. securities
Free cash flow
Year 0 1 2 3
FCF 0 0 0
Terminal value
Total 0 0 0
Year 0 1 2 3
FCF 0 0 0
Terminal value
Total 0 0 0
Data table: The effect of sales growth (cell B2) on equity valuation
Growth
0%
2%
4%
6%
8%
10%
12%
14%
16%
WACC ¯
80.00 10% 12% 14%
0%
Growth rate of of Terminal Value FCF--> 2%
4%
6%
8%
10%
12%
14%
16%
4 5
4 5
4 5
0 0
0
0 0
4 5
0 0
0
0 0
16% 18% 20% 22% 24% 26%
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 8.00%
Tax rate 40%
Dividend payout ratio 50% <-- Increased from 40%
Year 0 1 2 3
Income statement
Sales 1,000
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
Balance sheet
Cash and marketable securities
Current assets
Fixed assets
At cost
Depreciation
Net fixed assets
Total assets
Current liabilities
Debt
Stock
Accumulated retained earnings
Total liabilities and equity
Year 0 1 2 3
Free cash flow calculation
Profit after tax 0 0 0
Add back depreciation 0 0 0
Subtract increase in current assets 0 0 0
Add back increase in current liabilities 0 0 0
Subtract increase in fixed assets at cost 0 0 0
Add back after-tax interest on debt 0 0 0
Subtract after-tax interest on cash and mkt. securitie 0 0 0
Free cash flow 0 0 0
TRATION
4 5
4 5
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
NO NEGATIVE CASH BALANCES
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
Costs of goods sold
Interest payments on debt
Interest earned on cash and marketable securities
Depreciation (100)
Profit before tax
Taxes
Profit after tax
Dividends
Retained earnings
Balance sheet
Cash and marketable securities 80
Current assets
Fixed assets
At cost
Depreciation (300)
Net fixed assets
Total assets
Current liabilities
Debt
Stock
Accumulated retained earnings
Total liabilities and equity
Year 0 1 2
Free cash flow calculation
Profit after tax 0 0
Add back depreciation 0 0
Subtract increase in current assets 0 0
Add back increase in current liabilities 0 0
Subtract increase in fixed assets at cost 0 0
Add back after-tax interest on debt 0 0
Subtract after-tax interest on cash and mkt. securities 0 0
Free cash flow 0 0
ANCES
3 4 5
3 4 5
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
0 0 0
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 2 3
Income statement
Sales 1,000
Costs of goods sold (500)
Interest payments on debt (32)
Interest earned on cash & marketable securities 6
Depreciation (100)
Profit before tax 374
Taxes (150)
Profit after tax 225
Dividends (135)
Retained earnings 90
Balance sheet
Cash and marketable securities 80
Current assets 150
Fixed assets
At cost 1,070
Acc Depreciation (300)
Net fixed assets 770
Total assets 1,000
Current liabilities 80
Debt 320
Stock Initial (year 0) 450
Accumulated retained earnings debt/equity ratio: 150
Total liabilities and equity =B36/(B37+B38) 1,000
Year 0 1 2 3
Free cash flow calculation
Profit after tax 0 0 0
Add back depreciation 0 0 0
Subtract increase in current assets 150 0 0
Add back increase in current liabilities (80) 0 0
Subtract increase in fixed assets at cost 1070 0 0
Add back after-tax interest on debt 0 0 0
Subtract after-tax interest on cash & mkt. securities 0 0 0
Free cash flow 1140 0 0
ach year
4 5
0.30 0.30
4 5 Initial (year 0)
debt/equity ratio:
=B36/(B37+B38)
Initial (year 0)
debt/equity ratio:
=B36/(B37+B38)
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
PROJECT FINANCE
No dividends, debt repayment schedule fixed, net fixed assets constant
Sales growth 15%
Current assets/Sales 15%
Current liabilities/Sales 8%
Costs of goods sold/Sales 45%
Depreciation rate 10%
Interest rate on debt 10.00%
Interest paid on cash and marketable securities 8.00%
Tax rate 40%
Dividend payout ratio 0% <-- No dividends until all the debt is paid of
Year 0 1 2 3
Income statement
Sales 1,150
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
Balance sheet
Cash and marketable securities 0
Current assets 200
Fixed assets
At cost 2,000
Acc. Depreciation 0
Net fixed assets 2,000
Total assets 2,200
e debt is paid of
4 5
4 5
0 0
0 0
Cash flow
0 0 generated by
0 0 depreciation equals
capital
0 0
expenditures.
0 0
0 0
0 0
0 0
0 0
0 0
0 0
0 0
4 5
- - <-- =G23+G37+G38
PROJECT FINANCE
With these parameters the project cannot pay off its debt
Sales growth 15%
Current assets/Sales 15%
Current liabilities/Sales 8%
Increased COGS/Sales
Costs of goods sold/Sales 55% from 45% to 55%
Depreciation rate 10%
Interest rate on debt 10.00%
Interest paid on cash and marketable securities 8.00%
Tax rate 40%
Dividend payout ratio 0% <-- No dividends until all the debt is paid of
Year 0 1 2 3
Income statement
Sales 1,150
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
Balance sheet
Cash and marketable securities 0
Current assets 200
Fixed assets
At cost 2,000
Depreciation 0
Net fixed assets 2,000
Total assets 2,200
ed COGS/Sales
5% to 55%
bt is paid of
4 5
4 5
0 0
0 0
0 0
0 0
0 0
0 0
- -
0 0
4 5
- -