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
5
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
4
5
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
FINANCIAL MODEL
Build a financial model with the included template.
Assume that the levels of stock and debt are fixed
at year 0 levels. Assuming the WACC is 20% and
the long-term growth rate is 4%, value the
company's equity. Also show the value with mid-
year discounting.
Questions:
a) What does it mean to have stock and debt fixed?
b) Why isn't cash considered a current asset here? Isn't having cash a
good thing?!