Answers to Quantitative Questions Exam 3

2. Nemo Inc. manufactures life-vests for marine use. Based on the following information, what are the companys free cash flows to the firm (FCFF) for the year ended October 31, 2009? October 31 Cash Net operating working capital Net long-term operating assets Net nonoperating obligations (NNO) Net operating profit after tax (NOPAT) Discount factor 2009 $4,400 $1,400 $2,400 $300 $400 5.4% 2008 $3,560 $700 $2,000 $200 $360 5.8%

Rationale: FCFF = NOPAT- increase in net operating assets (NOA) NOA = Net operating working capital + Net long-term operating assets 2008 NOA = $700 + $2,000 = $2,700 2009 NOA = $1,400 + $2,400 = $3,800 FCFF = $400 ($3,800 $2,700) = -$700 3. Assume the following free cash flows for Caterpillar Inc. for 2009 and forecasted FCFF for 2010 onward (in millions): Current 2009 $2,569 Forecast Horizon 2011 2012 $2,897 $3,312 Terminal Year $3,789

($millions) Free cash flows to the firm (FCFF)

2010 $2,698

2013 $3,645

What is the value of the firm using the FCFF information above, a discount rate of 8%, and an expected terminal growth rate of 3.5%? Answer: $2,698/1.08 + $2,897/1.082 + $3,312/1.083 + $3,645/1.084 + (($3,789/(.08-.035))/1.084 = $72,180 (rounded to the nearest dollar)

5. Following are financial statement numbers and select ratios for Darden Restaurants Inc. for the year ended February 3, 2008. Use the information to determine the residual operating income (ROPI) in 2009. 2008 Sales $6,626,590 2008 Net operating assets (NOA) $2,881,459 Sales growth, 2009 through 2012 9.1% Net operating profit margin (NOPM) 6.8% Net operating asset turnover (NOAT) 2.37 Terminal growth rate 4% Discount rate 8% Answer: Sales (2009) NOPAT (2009) RNOA ROPI $ $ $ 7,229,610 491,613 17.06% 261,097

Answers to Quantitative Questions Exam 3

6. Following are the balance sheet and income statement (in thousands) for Golden Books. Golden Books Balance Sheet at December 31 (in thousands) 2008 Cash $ 1,023 Accounts Receivable 1,473 Inventories 4,568 Total Current Assets 7,064 Plant Assets, Net Total Assets Accounts Payable Accrued Liabilities Total Current Liabilities Long-term Debt Total Stockholder's Equity Total Liabilities and Equity 10,987 $18,051 $ 991 875 1,866 4,472 11,713 $18,051

2007 $ 979 1,596 3,857 6,432 10,625 $17,057 $ 848 745 1,593 5,199 10,265 $17,057

Golden Books Income Statement for the year ended December 31 (in thousands) 2008 2007 Revenues $12,082 $10,437 Cost of Books Sold 5,938 5,014 Gross Profit 6,144 5,423 Selling, General and Admin Expenses 3,969 3,507 Operating Profit 2,175 1,916 Interest Expense 250 225 Pretax Income 1,925 1,691 Income Tax Expense 578 507 Net Income $ 1,347 $ 1,184 a. Calculate net operating profit after tax (NOPAT) for 2008. b. Calculate net operating assets (NOA) for 2007 and 2008. Assume that the companys statutory tax rate is 30%. c. What is the free cash flows to the firm (FCFF) for 2008 for the Golden Books? d. What is the residual operating income (ROPI) for 2008 for the Golden Books? The companys weighted average cost of capital is 8.45%. NOPAT 2008 NOA 2008 NOA 2007 FCFF RNOA ROPI 1,522 16,185 15,464 801 9.84% $ 215.29

Answers to Quantitative Questions Exam 3

7. Apex Foods is a manufacturer and distributor of numerous food items. The company has a book value of $20.17 per share. Apex Foods is part of the food processing industry which has an industry PB ratio of 2.17. Using industry information, estimate the intrinsic value of Apex Foods equity per share? Answer: 43.77

8. Cary Computers is a manufacturer of computer parts. The company recently reported earnings of $679,789. In addition, Cary Computers has 212,500 shares issued and outstanding. The company has a PE ratio of 21.8. Cary Computers is part of the computer parts industry which has an industry P/E ratio of 24.3. Using industry information, estimate the intrinsic value of Cary Computers equity per share. Answer: $77.74

10. Swift Creek Learning is a retailer focused on education supplies. The company has a book value of $19.25 per share. Swift Creek Learning has a PB ratio of 6.23 and the education supplies industry PB ratio is 5.31. Assuming that comparable industry companies are priced correctly the intrinsic value of Swift Creek Learnings equity per share is a. b. c. d. overvalued $17.71 per share undervalued $17.71 per share priced correctly overvalued by $19.25 per share