Income Statement 2020
Sales $100.00
Operating costs except depreciation $30.00
Depreciation $20.00
EBIT $50.00
Interest $10.00
EBT $40.00
Tax (25%) $10.00
$30.00
Balance Sheet 2019 2020
Gross PP&E $100.00 $140.00
Accumulated Depreciation $50.00 $70.00
Net PP&E $50.00 $70.00
Net Working Capital $50.00 $50.00
Free Cash Flow Alternatives
Formula 1: NOPAT - CHG in NWC - CHG in net PPE
EBIT * (1-T) $37.50
Chg in NWC $0.00
Net PP&E -$20.00
FCF $17.50
Formula 2: NOPAT + Depreciation - CHG in NWC - CHG in gross PPE
EBIT * (1-T) $37.50
Depreciation $20.00
Chg in NWC $0.00
Gross PP&E -$40.00
$17.50
n gross PPE
Use the information below to estimate Garnet Inc.’s free cash flow in 2013.
INCOME STATEMENT 2012
Net sales $500.0
Costs $380.0
Depreciation $25.0
Total operating costs $405.0
EBIT $95.0
Interest $21.0
Earnings before taxes $74.0
taxes (30%) $22.2
Net income $51.8
Free Cash Flow Calculation
NOPAT = EBIT*(1-T) = $70.0
RIOC:
Change in NWC $7.0
Change in net PP&E $16.0
$23.0
FCF = NOPAT - RIOC $47.0
free cash flow in 2013.
2013 BALANCE SHEET 2012
$530.0 Assets
$400.0 Cash $27.0
$30.0 Marketable securities $66.0
$430.0 Accounts receivable $80.0
$100.0 Inventories $106.0
$23.0 Total current assets $279.0
$77.0 Net PP&E $265.0
$23.1 Total Assets $544.0
$53.9
Liabilities and Equity
Accounts payable $52.0
notes payable $130.0
Accruals $28.0
total current liabilities $210.0
long-term bonds $164.0
Equity $100.0
Total liabilities and equity $544.0
Net Working Capital $133.0
2013
$28.0
$69.0
$84.0
$112.0
$293.0
$281.0
$574.0
$56.0
$138.0
$28.0
$222.0
$173.0
$100.0
$547.0
$140.0
FCF Valuation Example
Dozier Corp. is a fast-growing supplier of office products. Analysts project the
for the next 3 years, after which FCF is expected to grow at a constant 7% rat
Dozier has $10 million in marketable securities, $100 million in debt, and 10 m
outstanding. It’s WACC is 13%.
A) What is Dozier's horizon value?
B) What is Dozier's current value of operations?
C) What is the stock price of Dozier?
Year 1 Year 2 Year 3
FCF ($ million) -$20.00 $30.00 $40.00
Solution - FCF Valuation
Variables
FCF3 $40.00 Vnon-op
WACC 13.0% Shares
terminal growth 7.0% Debt
Horizon value $713.33
Year 1 Year 2 Year 3
FCF ($ million) -$20.00 $30.00 $40.00
Discount Factor 1.13 1.28 1.44
-$17.70 $23.49 $27.72
Value of Operations $527.89
Vnon-op $10.00
Value of Firm $537.89
Value of Debt $100.00
Value of Equity $437.89
Outstanding shares 10.00
Stock Price $43.79 if market price matches intrins
ysts project the following FCF
onstant 7% rate.
n debt, and 10 million shares
$10.0
10.0
$100.0
HV
$713.33
1.44
$494.38
matches intrinsic value
