MIRANDA, SHARMAINE C.

BSA-3A

QUESTION 1

The table displays the income statement and reorganized balance sheet for Brand Co, a
consumer products company. Using the methodology discussed in Lesson 2, determine net
operating profit less adjusted taxes (NOPLAT) for years 1 to 6. Assume an operating tax rate
of 30 percent. Using the methodology in Lesson 2 also to determine free cash flow for years 1
to 6. Do this using Microsoft Excel.
QUESTION #1
Calculation of NOPLAT:
Year 1 2 3 4 5
Revenues 4,841.50 4,304.20 4,538.90 4,859.00 5,126.20
Operating Cost -3,435.20 -3,658.50 3,896.30 -4,130.10 4,357.30
Depreciation -97 -103.3 110 116.6 123
Operating
509.3 542.4 532.6 612.3 645.9
EBITDA
Operating Cash
-152.8 -162.7 159.8 183.7 193.8
taxes (30%)
NOPLAT 356.5 379.7 372.8 428.6 452.1

Calculation of free
cash flow:

Year 1 2 3 4 5
NOPLAT 356.5 379.7 372.8 428.6 452.1
Depreciation 97 103.3 110 116.6 123
Gross cash flow 454.5 485 485.8 549.2 580.1
Decrease(increas
e) in operating 13.2 13.1 14 13.7 13.4
working capital
Capital
expenditure net of 105.8 105.1 111.9 110 106.9
disposals
FREE CASH
361.9 393 387.9 452.9 486.6
FLOW
6
5,382.50
4,575.10
129.2
678.2

203.5
472.7

6
474.7
129.7
609.9

12.8

102.5

520.2
MIRANDA, SHARMAINE C.
BSA-3A

QUESTION 2
Using the same information in Question 1, Brand Co currently has 65.6 million shares outstanding.
If Brand Co’s shares are trading at $57 per share, what is the company’s market capitalization
(value of equity)? Assuming the market value of debt equals today’s book value of debt, what
percentage of the company’s value is attributable to debt, and what percentage is attributable to
equity? When would the market value of debt not equal the book value? Using these weights,
compute the weighted average cost of capital. Assume the pretax cost of debt is 8 percent, the
cost of equity is 12 percent, and the marginal tax rate is 30 percent. Do this using Microsoft Excel.

ANSWER:
Compute company's market capitalization as follows:
Company's market capitalization = Shares outstanding x Current price
= $65.6 million x $57
= $3,739.20 million

Computation of WACC as follows: Working note:

Market value Cost Weight WACC Compute cost of debt after tax as follows:
a b axb kd (after tax) = Kd (before tax) x (1-tax rate)
Debt $1,869.90 5.60% 0.333 1.87% = 8% x (1 -0.30)
Equity $3,739.20 12% 0.667 8.00% = 8% x 0.70
Total $5,608.80 1 9.87% = 5.60%
 es outstanding.
et capitalization
e of debt, what
s attributable to
these weights,
s 8 percent, the
Microsoft Excel.

Compute the weights as follows: Weight of equity = Equity value

ebt after tax as follows: Weight of debt = Debt value Total capital
(before tax) x (1-tax rate) Total capital = $3,739.20
% x (1 -0.30) = $1,869.90 $5,608.80
$5,608.80 = 0.667
= 0.333
MIRANDA, SHARMAINE C.
BSA-3A

Question 3
Using the next five years of free cash flow computed in Question 1, an estimated continuing value
at the end of year 5, and the weighted average cost of capital computed in Question 2, estimate
Brand Co’s enterprise value. Assume a long-term growth rate in cash flows of 5 percent and a
return on new invested capital (RONIC) of 15 percent. (Brand Co currently has no nonoperating
assets.)

Firm value= NOPLAT x (1-g/RONIC) / WACC-g

= 461.9 x (1-0.05/0.15)/ 0.1155-0.05
= 2,666.039
nuing value
2, estimate
cent and a
noperating