INPUT DATA SECTION: 2014 2013

Year-end stock price $23.06 $26.00

Shares outstanding (in millions) 50 50
Tax rate 40% 40%
BALANCE SHEET
BALANCE SHEETS - Sala Products - December 31 2014 2013
(in millions of dollars)
Assets
Cash and equivalents $ 10 $ 80
Accounts receivable 375 315
Inventories 615 415
Total current assets $ 1,000 $ 810
Net plant and equipment 1,000 870
Other assets expected to last more than 1 year - -
Total assets $ 2,000 $ 1,680

Liabilities and Equity

Accounts payable $ 60 $ 30
Accruals 140 130
Notes payable 110 60
Total current liabilities $ 310 $ 220
Long-term bonds 750 580
Total debt $ 1,060 $ 800
Common stock (50,000,000 shares) 130 130
Retained earnings 810 750
Total common equity $ 940 $ 880
Total liabilities and equity $ 2,000 $ 1,680

INCOME STATEMENT
INCOME STATEMENTS - Sala Products - Years Ending December 31
(in millions of dollars) 2014 2013

Net sales $ 3,000.0 $ 2,850.0

Operating costs except depreciation and amortization 2,616.2 2,497.0
Depreciation and amortization 100.0 90.0
Earnings before interest and taxes (EBIT) $ 283.8 $ 263.0
Less interest 88.0 60.0
Earnings before taxes (EBT) $ 195.8 $ 203.0
Taxes 78.3 81.2
Net income $ 117.5 $ 121.8

Common dividends $ 57.5 $ 53.0

Addition to retained earnings $ 60.0 $ 68.8
PER-SHARE DATA
2014 2013
Common stock price
Earnings per share (EPS)
Dividends per share (DPS)
Book value per share (BVPS)

STATEMENT OF CASH FLOWS

STATEMENT OF CASH FLOWS - Sala Products (2014)
I. Operating Activities 2014
Net income $ 117.5
Depreciation and amortization 100.0
Increase in inventories (200.0)
Increase in accounts receivable (60.0)
Increase in accounts payable 30.0
Increase in accrued wages and taxes 10.0
Net cash provided by (used in) operating activities $ (2.5)

II. Long-Term Investing Activities

Additions to property, plant, and equipment $ (230.0)
Net cash used in investing activities $ (230.0)

III. Financing Activities

Increase in notes payable $ 50.0
Increase in bonds outstanding 170.0
Payment of dividends to stockholders (57.5)
Net cash provided by financing activities $ 162.5

IV. Summary
Net decrease in cash and equivalents: (Net sum of I, II, I$ (70.0)
Cash and equivalents at beginning of the year 80.0
Cash and equivalents at end of the year $ 10.0

STATEMENT OF STOCKHOLDERS' EQUITY

STATEMENT OF STOCKHOLDERS' EQUITY - Sala Products (2014)
(in millions of dollars) Total
Common Stock Retained Stockholders'
Shares (000) Amount Earnings Equity
Balances, December 31, 2013 50,000 $130.0 $750.0 $880.0
2014 Net income 117.5
Cash dividends (57.5)
Addition to retained earnings $60.0
Balances, December 31, 2014 50,000 $130.0 $810.0 $940.0
FREE CASH FLOW

FCF =
FCF =
FCF =

Sala Products: Free Cash Flow Valuation

Part 1. Key Inputs Forecasted Years
2015 2016 2017 2018
Sales growth rate 10.0% 9.0% 9.0% 9.0%
Operating costs as a % of sales 87.0% 87.0% 86.0% 85.0%
Growth in net fixed assets 8.0% 8.0% 8.0% 8.0%
Growth in NOWC 8.0% 8.0% 8.0% 8.0%
Depr'n as a % of operating capital 6.0% 8.0% 7.0% 7.0%
Tax rate 40%
WACC 10%
Long-run FCF growth, gFCF 6.0%

Part 2. Forecast of Cash Flows During Period of Nonconstant Growth

Historical Forecasted Years
2014 2015 2016 2017 2018

Sales
Operating costs
DEP = Depreciation
EBIT
EBIT x (1 − T)
EBIT x (1 − T) + DEP

Net fixed assets

Net oper. working capital (NOWC)
Total operating capital
Net CAPEX = Change in net fixed assets
expenditures
= Net CAPEX + DEP
ΔNOWC

CAPEX
− ΔNOWC
PV of FCFs

Part 3. Horizon Value and Intrinsic Value Estimation

Estimated Value at the Horizon, 2019 FCF2019 (1+gFCF)
Free Cash Flow (2020) FCF2020
HV2019 =
 HV2019 =
Horizon Value at 2019, HV2019 WACC − gFCF
PV of HV2019 HV2019 / (1+WACC)N

Calculation of Firm's Intrinsic Value

Sum of PVs of FCFs, 2015-2019
PV of HV2019
Total corporate value
Less: market value of debt and preferred
Intrinsic value of common equity
Shares outstanding (millions)

Intrinsic Value Per Share

Fill in the yellow blank
ockholders'
s
2019
8.0%
85.0%
8.0%
8.0%
7.0%

s
2019
WACC − gFCF