attached
1. In this simple question, I will walk you step by step through a FCFE valuation. Ingles Inc., is a slow growing cash cow. Last year, the company saw an ROE of 22.0% (avg., 21.2% over last five years), and reinvested 45% of its Net Income back into the business (avg., 53.5% over last five years) leaving 55% as FCFE (avg., 46.5% over last five years). Last year, FCFE was $679M on Net Income of $1,235M. The closing Shareholders’ Equity was $5,620M. The company needs to restructure its operations over the next three years. In the following 3 years, ROE is expected to fall to 18.0% due to restructuring costs. Furthermore, the company will reinvest 65% of Net Income each year over this three-year period – this represents additional investment needed to upgrade operations. After the three-year period, the company expects to enter into a long-run trend where ROE will average 24.0%. In addition, over the long-term, the company expects to reinvest at a much lower rate of 20%. The appropriate discount rate is 10.0%. What growth rate will the company experience each year over the three-year period ______1.3689%____________ ________________________________? · Growth Rate = ROE* Retention Rate · Expected ROE = 18% · Expected Retention Rate = 65% · =11.70%(18%*65%) = · .117(.18*.65)= Particulars Previous Year 1st Year 2nd Year 3rd Year Closing Shareholder’s Equity 5620 6632 7825 9234 Net Income 1235 1012 1194 1409 FCFE 679 354 418 493 Re-investment 556 658 776 916 Re-investment % 45% 65% 65% 65% ROE 22% 18% 18% 18% · Net Income = Previous Year Closing Shareholder’s Equity * ROE · Closing Share Holder’s Equity = Current Year Net Income + Previous Year Share Holder’s Equity · FCFE = Net Income * (100%-Re-investment Rate) What is the closing Shareholders’ Equity at end of next three years ____________6632_______________ and __________7824________________ and ___________9234______________? What is the Net Income for next three years ________1012_____________ and ___________1194_______________ and __________1409_______________? What is the FCFE for next three years ________354_____________ and ____________418______________ and ___________493______________? What growth rate will the company experience each year over the long-term __________________ ________________________________? Estimate a Terminal Value using a Gordon’s Model_______________________________? What is the present value of FCFE in years one through three _______________________________ __________________________________? What is the present value of the Terminal Value calculated above __________________________ _____________________________________________? What is the Market Cap of the company _____________________________________________________? 2. Over the last year, Fiscal 2020, Atlas Inc., had the following results. The company had revenues of $1.27B last year, yielding operating income (or EBIT) of $258M, and net income of $162M. The company had an effective tax rate of 19.2% for the year. The company has a simple balance sheet, current assets at the end of Fiscal 2020 was $227M (Fiscal 2019, $198M) and consisted of inventory, accounts receivable and a small amount of cash for operations. The only long-term asset is property, plant and equipment, net, at the end of Fiscal 2020 was $253M (Fiscal 2019, $239M).[footnoteRef:1] [1: The change of $253M – 239M = $14M consist of $26M of gross capex less depreciation charged of $12M giving Capex, net of $14M.] Current liabilities totaled $224M at end of Fiscal 2020, ($174M Fiscal 2019) – this included $74M in short-term debt, ($34M in Fiscal 2019). The only long-term liability is debt, this amounted to $182M at end of Fiscal 2020, ($123M in Fiscal 2019). Finally, the closing equity for Fiscal 2020 is $74M, ($140M in Fiscal 2019). For Fiscal 2020, the Operating Margin and Net Income Margin were ______________________________ and ____________________________, respectively? For Fiscal 2020, the Average Total Asset Turn and Average Equity Multiplier were ______________________________ and ____________________________, respectively? Using the previous answers, demonstrate the basic DuPont Equation and show how calculated ROE from first principles and from the DuPont Equation are the same: Calculate FCFE for Fiscal 2020 using two approaches, change in operating accounts and changes in debt; AND change in shareholders’ equity. Show how the two are the same _____________________________________________________ and ____________________________________________________. Using the previously calculated FCFE and Net Income, what is the reinvestment rate on Shareholders’ Equity for Fiscal 2020 _______________________________________________? IF, the company maintains the same ROE and investment rates for next year, how quickly should Shareholders’ Equity and Net Income grow next year ____________________________________________? Invested Capital for Fiscal 2020 and Fiscal 2019 were _____________________ and ___________________? What was NOPAT and ROIC for FISCAL 2020 ____________________ and ___________________? Calculate FCFF for Fiscal 2020 using two approaches, change in operating accounts; and change in invested capital. Show how the two are the same _____________________________________________________ and ____________________________________________________. Using the previously calculated FCFF and NOPAT, what is the reinvestment rate on Invested Capital for Fiscal 2020 _______________________________________________? IF, the company maintains the same ROIC and reinvestment rates for next year, how quickly should Invested Capital and NOPAT grow next year ____________________________________________? 1 Fall 2020