Posted: May 30th, 2015
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Web-surfing exercise: Find a fast-growth publicly traded firm with financial statements posted on the firm’s Web page. Relate that firm’s financial statements to those of the examples in this chapter.
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Formulate the process by which you would project that firm’s financial statements into the future in order to conduct a valuation.
Chapter 9: Exercises/Problems: # 2 p. 344
2.
[Venture Present Values] The TecOne Corporation is about to begin producing and selling its prototype product. Annual cash flows for the next five years are forecasted as:
Chapter 9: Softec Mini Case: p. 348 A- F only
MINI CASE: SoftTec Products company
The SoftTec Products Company is a successful, small, rapidly growing, closely held corporation. The equity owners are considering selling the firm to an outside buyer and want to estimate the value of the firm. Following is last year’s income statement (2010) and projected income statements for the next four years (2011–2014). Sales are expected to grow at an annual 7 percent rate beginning in 2015 and continuing thereafter.
ACTUAL
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PROJECTED
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[$ THOUSANDS] | 2010 | 2011 | 2012 | 2013 | 2014 |
Net sales | $150.0 | $200.0 | $250.0 | $300.0 | $350.0 |
Cost of goods sold | −75.0 | −100.0 | −125.0 | −150.0 | −175.0 |
Gross profit | 75.0 | 100.0 | 125.0 | 150.0 | 175.0 |
SG&A expenses | −30.0 | −40.0 | −50.0 | −60.0 | −70.0 |
Depreciation | −7.5 | −10.0 | −12.5 | −15.0 | −17.5 |
Earnings before interest and taxes | 37.5 | 50.0 | 62.5 | 75.0 | 87.5 |
Interest | −3.5 | −3.5 | −3.5 | −3.5 | −3.5 |
Earnings before taxes | 34.0 | 46.5 | 59.0 | 71.5 | 84.0 |
Taxes (40% rate) | −13.6 | −18.6 | −23.6 | 728.6 | −33.6 |
Net income | $ 20.4 | $ 27.9 | $ 35.4 | $ 42.9 | $ 50.4 |
Selected balance sheet accounts at the end of 2010 were as follows. Net fixed assets were $50,000. The sum of the required cash, accounts receivable, and inventories accounts was $50,000. Accounts payable and accruals totaled $25,000. Each of these balance sheet accounts was expected to grow with sales over time. No changes in interest-bearing debt were projected, and there were no plans to issue additional shares of common stock. There are currently 10,000 shares of common stock outstanding.
Data have been gathered for a comparable publicly traded firm in the same industry that Soft-Tec operates in. The cost of common equity for this other firm, Wakefield Products, was estimated to be 25 percent. SoftTec has survived for a period of years. Management is not currently contemplating a major financial structure change and believes a single discount rate is appropriate for discounting all cash flows.
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