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(Solved) Ex_1 Exhibit 1 Operating Expenses for Years Ending December 31, 1993-1995, and for First Quarter 1996 (thousands of dollars) Net sales Cost of Goods...


This is a case study where the first part of the valuation of operating assets has been done. Referring to the balance sheet need help on finding the non operating assets (last tab)

Ex_1 Exhibit 1 Operating Expenses for Years Ending December 31, 1993-1995, and for First Quarter 1996
(thousands of dollars) Net sales
Cost of Goods Sold:
Beginning inventory
Purchases
Ending inventory
Total Cost of Goods Sold
Gross profit
Operating expensesb
Earnings before interest and taxes
Interest expense
Net income before income taxes
Provision for income taxesc
Net income 1993
$2,921 1994
$3,477 1995
$4,519 330
2,209
$2,539
337
$2,202
719
622
$97
23
$74
14
$60 337
2,729
$3,066
432
$2,634
843
717
$126
42
$84
16
$68 432
3,579
$4,011
587
$3,424
1,095
940
$155
56
$99
22
$77 1st Quarter
1996
$1,062 a
587
819
$1,406
607
$799
263
244
$19
13
$6
1
$5 In the first quarter of 1995, sales were $903,000 and net income was $7,000.
Operating expenses include a cash salary for Mr. Clarkson of $75,000 in 1993; $80,000 in 1994; a
b $85,000 in 1995; and $22,500 in the first quarter of 1996. Clarkson Lumber was required to estimate its income tax liability for the current tax year and pay four c quarterly estimated tax installments during that year. The first $50,000 of pretax profits were taxed
at a 15% rate; the next $25,000 were taxed at a 25% rate; the next $25,000 were taxed at a 34% rate;
and profits in excess of $100,000 but less than $335,000 were taxed at a 39% rate. Page 1 Ex_1 and pay four Page 2 Ex_2 Exhibit 2 Balance Sheets at December 31, 1993-1995, and March 31, 1996 (thousands of dollars) Cash
Accounts receivable, net
Inventory
Current assets
Property, net
Total Assets
Notes payable, banka
Note payable to Holtz, current portionb
Notes payable, trade
Accounts payable
Accrued expenses
Term loan, current portionc
Current liabilities
Term loanc
Note payable, Mr. Holtzb
Total Liabilities
Net worth
Total Liabilities and Net Worth 1993
$43
306
337
$686
233
$919 1994
$52
411
432
$895
262
$1,157 1995
$56
606
587
$1,249
388
$1,637 1st Quarter
1996
$53
583
607
$1,243
384
$1,627 $ 60
100
-340
45
20
$565
120
100
$785
372
$1,157 390
100
127
376
75
20
$1,088
100
0
$1,188
449
$1,637 399
100
123
364
67
20
$1,073
100
0
$1,173
454
$1,627 ---213
42
20
$275
140
-$415
504
$919 Interest is computed on the average outstanding loan balance at the rate of prime plus 2 1/2%.
Interest is fixed at 11% times the outstanding balance.
c
Interest is fixed at 10.0% times the outstanding balance; the term loan is secured by the fixed assets
a
b and is repayable in semiannual installments of $10,000. Page 3 Ex_2 Page 4 CLARKSON LUMBER - Assignment 1 Keith Clarkson, sole owner and president of the Clarkson Lumber Company, has received a number of informal inquiries from large, nationally-recognized
building materials distributors about purchasing his company. Although Clarkson relishes operating his own business the would be interested if an
attractive offer were received. Unfortunately, Mr. Clarkson is unsure how much his company is worth so he turns to you for guidance.
Your end goal, in assignment 1, is to value Clarkson Lumber operations at the beginning of 1996, that is to value its operating assets at the end of 1995
based on the free cash flows they are going to generate from 1996 to infinity.
You will assume the firm will obtain a credit line at Northrup National Bank sufficiently large to take advantage of discounts on purchases for paying
within 10 days of invoice, thus increasing operating profit margins.
With higher mark-ups and continued operating expense controls, Clarkson projects a steady operating profit margin of 6% by 2000. Margins and
investment requirements will also stabilize in relation to sales growth. Relevant projection inputs are in the table below and the discount rate is 11.5%.
Note that the forecast ratios already include the benefit the of the 2% trade discounts.
For simplicity, use a tax rate of 35% throughout the projections.
Make whatever other reasonable assumptions are necessary to complete your analysis and explain the rationale for each. Projection Assumptions
Sales
Sales growth rate
COGS/Sales
Op Exp/Sales
OPM
Tax rate
AR DOH (= AR/daily sales)
Inv DOH (=inventory/daily COGS)
NFATO (@Sales) (= sales/NFA)
AP DOH (AP/daily purchases)
Acc Exp/Sales avg 93-95 1997 1998 1999 24.5%
75.6%
20.9%
3.5%
20.5% 1996
5,500
21.7%
75.0%
20.4%
4.6%
35% 20%
74.0%
20.0%
6.0%
35% 15%
74.0%
20.0%
6.0%
35% 10%
74.0%
20.0%
6.0%
35% 43.4
59.4
12.5
39.7
1.46% 43.4
59.4
12.5
10
1.46% 43.4
59.4
12.5
10
1.46% 43.4
59.4
12.5
10
1.46% 43.4
59.4
12.5
10
1.46% 1 - Project free cash flows for the next five years, 1996 to 2000 (please refer to video 25 to get the FCF in 1996)
2 - Use the same assumptions as in 2000 in order to compute the FCF of 2001, 2002 and 2003. Then, see if they follow a constant growth pattern year on year.
3 - Compute the present value (at the end of 1995) of each cash flow from 1996 to 2000.
4 - Compute the present value (at the end of 1995) of all the cash flows from 2001 to infinity.
5 - Put everything together to compute the value of the firm operations at the end of 1995. NOP Projection
Sales
- COGS
= Gross Profit
- Operating expenses
= EBIT
- Tax on EBIT
= NOP (Net Operating Profit) 1,995 1,996
5,500
4,125
1,375
1,122
253
89
164 1,997
6,600
4,884
1,716
1,320
396
139
257 1,998
7,590
5,617
1,973
1,518
455
159
296 1,999
8,349
6,178
2,171
1,670
501
175
326 ∆ NFA Projection
NFA
∆ NFA Projection 1,995
388 1,996
440
52 1,997
528
88 1,998
607
79 1,999
668
61 ∆ OWC Projection
Accounts Receivable
+ Inventory
- Accounts Payable
- Accrued expenses
OWC
∆ OWC Projection 1,995
606
587
376
75
742 1,996
654
671
115
80
1,130
388 1,997
785
795
137
96
1,346
216 1,998
902
914
157
111
1,549
203 1,999
993
1,005
172
122
1,705
156 Purchase Projection
Beginning inventory
+ Purchases
- COGS
= Ending inventory 1,995 1,996
587
4,209
4,125
671 1,997
671
5,008
4,884
795 1,998
795
5,736
5,617
914 1,999
914
6,270
6,178
1,005 Free Cash Flow Projection & Discounting
Net Operating Profit
- Change in NFA 1,995 1,996
164
52 1,997
257
88 1,998
296
79 1,999
326
61 - - - - - Change in OWC - 388 - 216 Free Cash Flow
Present Value at the end of 1995 - 275
247 - 47
38 - 203
14
10 - 156
109
70 Free Cash Flow
% growth Free Cash Flow
Residual value valued in 2000 We notice a constant growth pattern from 2001 onwards. Therefore we can appl
This formula will give us the present value of all cash flows at the end of the year precedi
Putting it all together
PV (FCF 96 to 00)
+ PV (FCF 01 to infinity)
= Value of operations Value
- 75
2,092
2,017 om large, nationally-recognized
ould be interested if an
guidance.
ating assets at the end of 1995 s on purchases for paying by 2000. Margins and
d the discount rate is 11.5%. 2000 2001 2002 2003 5%
74.0%
20.0%
6.0%
35% 5%
74.0%
20.0%
6.0%
35% 5%
74.0%
20.0%
6.0%
35% 5%
74.0%
20.0%
6.0%
35% 43.4
59.4
12.5
10
1.46% 43.4
59.4
12.5
10
1.46% 43.4
59.4
12.5
10
1.46% 43.4
59.4
12.5
10
1.46% onstant growth pattern year on year. - 2,000
8,766
6,487
2,279
1,753
526
184
342 2,001
9,205
6,812
2,393
1,841
552
193
359 2,002
9,665
7,152
2,513
1,933
580
203
377 2,003
10,148
7,510
2,639
2,030
609
213
396 2,000
701
33 2,001
736
35 2,002
773
37 2,003
812
39 2,000
1,042
1,056
179
128
1,791
86 2,001
1,094
1,109
188
134
1,881
90 2,002
1,149
1,164
197
141
1,975
94 2,003
1,207
1,222
207
148
2,073
99 2,000
1,005
6,537
6,487
1,056 2,001
1,056
6,864
6,812
1,109 2,002
1,109
7,208
7,152
1,164 2,003
1,164
7,568
7,510
1,222 2,000
342
33 2,001
359
35 2,002
377
37 2,003
396
39 - - - - 86 - 90 - 94 - 99 222
129
234 246
5.00% 258
5.00% 3606
2001 onwards. Therefore we can apply the growing perpetuity formula.
h flows at the end of the year preceding the first cash flow, i.e. the end of 2000. CLARKSON LUMBER - Assignment 2
Following what was done in assignment 1 and going back to Clarkson Lumber balance sheet:
1 - Identify and value the non-operating assets of the firm as of 1995
2 - List and value the debt items of the firm as of 1995
3 - What is Mr. Clarkson' equity interest worth?

 


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