Strategic Finance

Exhibit 6.18 BrandCo: Income Statement and Recognized Balance Sheet

$million Income Statement Today Revenue Operating costs Depreciation Operating profit 800.0 -640.0 -40.0 120.0 Year 1 840.0 -672.0 -42.0 126.0

Interest expense Earning before taxes

-16.0 104.0

-16.0 110.0

Taxes Net Income

-26.0 78.0

-27.5 82.5

Recognized balance sheet $million Operating working capital Property and equitment Invested capital Today 70.1 438.4 508.5 Year 1 73.6 460.3 533.9

Debt Shareholder's equity Invested capital

200 308.5 508.5

210 323.9 533.9

Q1. (Refer to textbook page 131, Review Question 1) $million Revenue Operating costs Depreciation Operating profit Operating tax @ 25% NOPLAT NOPLAT Depreciation Gross cash flow Changes in operating working capital Increase in property and equiptment Gross Investment Free Cash Flow -31.5 94.5 94.5 42.0 136.5 3.5 63.9 67.4 69.1 Year 1 840.0 -672.0 -42.0 126.0

Q2. (Refer to textbook page 132, Review Question 2)

Equity value per share Oustanding shares Value of Equity

$19.16 50,000,000 $958,000,000.00

Weighted Average Cost of Capital percent

Source of Capital Debt Equity

Proportion of total capital 17.2711572 82.72884283

Cost of capital

Marginal tax rate 25

After-tax cost of capital 6 12

Contribution to weighted average 1.03626943 9.92746114 10.9637306

8 12

Additional Calculations, Market value of Debt Market value of Equity Total Capital $200,000,000 $958,000,000 $1,158,000,000

Proportion of total capital Debt (Market value of Debt/total capital) 17.2711572 Equity (Market value of Equity/total capital) 82.7288428

Q3. (Refer to textbook page 132. Review Question 3) $million Free Cash Flow WACC Growth Enterprise Value

69.1 0.10963731 5% 1158.6707

Enterprise Value = Free Cash Flow / (WACC - g)

BrandCo's enterprise value is $1158.671 million

Q4. (Refer to textbook page 132, Review question 4) $million Total value of the company Market value of debt...