Assignment for Home Maker-1

8/12/2019 Assignment for Home Maker-1

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F402/560

Assignment 3aSpring 2014

NAMES:

INSTRUCTIONS:

Write the names of everyone on the team for this assignment in the spaces above.

Compute the answers to the questions and place your answers in the red-outlined

answer boxes which are provided for each question.

For the multiple choice questions, place a border around the letter of your answer,

like this. (Your border does not have to be red; use any color you want.)

B.

Please do NOT insert or delete columns in the spreadsheet. And please do NOTchange any column widths.

For the calculations on the VF Corp. financial statements, please show all your

work and calculations on that second worksheet.

Keep all the calculations for each year in the same column.

Round dollar amounts to whole dollars unless otherwise stated.

Be sure to put the correct sign on all cash flows: Income, cash inflows and values bein

added get a positive sign; expenses, cash outflows and values being subtracted get a

negative sign.

When you have finished, then email your completed spreadsheet, as an attachment, to

course email address. Only one upload per team.

The course email address is:


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[email protected]

INSTRUCTIONS, continued:

You may use the blank space to the right of the questions on this sheet to make calcul

if you wish. You may use a hand calculator, if you must, but please try to use Excel for

all these calculations.

There are a total of 11 questions. Make sure you find and answer all 11 questions,

and make all the calculations required on the VFC worksheet.

Scoring is as follows.

Questions 1 10 are worth 3 points each.

Question 11, the VF spreadsheet, is worth 30 points.

Total points possible = 60. (Your score on this assignment will be converted to a perce

QUESTIONS

1. Use the following information to estimate the overall average cost of debt at this firm.

Show your answer as a percent with two decimal places.

INCOME STATEMENT

Sales 120,000 Debt 16000Operating costs (99,000) Equity 13000

Interest expense (1,240) Value 29000

Income before tax 19,760

Provision for tax (6,916) Weights

Net income 12,844 D/V 0.55172414

E/V 0.44827586

BALANCE SHEET

Cash 2,000

Operating assets 50,000Total assets 52,000

Accounts payable 15,000

Notes payable 4,000

Long-term debt 16,000

Deferred taxes 4,000


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Shareholders' equity 13,000

Total liabilities & equity 52,000

Answer:

2. Suppose the ROIC for a company, before the adjustment for operating leases, is 19%,

invested capital (before the adjustment for operating leases) of $450,000. The present

of operating leases was $190,000, both at the beginning of the year and at the end of

year (same for both). What will be the ROIC after the adjustment for operating leases?

Assume the company's cost of debt is 5%.


Answer:

3. If the market risk premium is 6%, what is the cost of equity, according to the CAPM, fo

firm with a beta of 0.88? Assume the risk-free rate is 3.5%.


Answer:

4. The market risk premium is also called the equity risk premium (ERP). It is the differen

between the returns on the stock market and the return on government bonds (assum

be a risk-free rate). For years, many analysts have assumed the market risk premium (

ERP) is approximately 6%. So when the risk-free rate is 3%, the expected return in the

equity markets should be about 9%. When the risk-free rate is 5%, the expected avera

return on stocks should be about 11%.

Recent research has called into question that 6% figure. A recent article in The Econodescribed recent research which put the ERP closer to 5.2% in the United States. A link

that Economistarticle is provided on the course website for Assignment 3.

Read the article and answer questions 5 through 7.

5. The research depicted in Chart 1 shows that the return on American equities for the 12

period 2000-2011 was approximately what percent?


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A. 4.0%

B. 6.0%

C. 0.0%

D. -5.4%

E. -7.6%

6. According to the article, when share valuations are high, future returns are likely to be:

A. high

B. low

C. volatile

D. stable

E. zero

7. Given the present state of dividend yields and expected dividend growth, one research

predicted a future real rate of return on equities in the U.S. of 4%. That still implies an

equity risk premium of at least 4%, since:

A. most investors still expect a risk premium of at least 4%.

B. equities have become less risky over time.

C. real returns on most government debt are now zero or negative.

D. government debt is no longer risk-free.

E. many pension funds expect an 8% rate of return.

8. Selected balance sheet values from a company are shown below. The company's cost o

is 5.7%. Its stock price is $14 per share, with a beta of 1.2. There are 75,000 shares

outstanding. Assuming a risk-free rate of 4%, calculate the company's WACC according

the procedure to be used in F402/F560.

Accounts payable 26,000

Short-term debt 93,000Long-term debt 375,000

Deferred taxes 9,000


Answer:


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9. Shown below are the levered betas for five companies, and their debt-to-equity ratios.

this information, what would you say is the required rate of return for industry risk in t

industry? That is, if an average company in this industry has no debt, what should be it

of capital? Using the procedure given in class, compute your best estimate of the requir

rate of return purely for industry risk in this industry. That is, find the median unlevere

beta, and then compute the CAPM assuming a risk-free rate of 3.5%.

Company Name D/E Beta

BorgWarner Inc. 10.46% 1.42

Dana Holding Corporation 62.60% 2.31

Lear Corp. 20.86% 1.24

TRW Automotive Holdings Corp. 25.60% 2.13

Visteon Corporation 23.90% 1.46


Answer:

10. Use the technique described in class to fill in the blank cells and balance the balance sh

shown below. Your balance sheet must continue to balance, even if I change the amou

PP&E or the amount of net income.

2011 2012

Cash & mktbl securities 400

Accounts receivable 2,400 2,500

Inventory 5,200 5,400

Total current assets 8,000

PP&E 8,800 9,100

Deferred taxes 500 500

Other assets 900 1,200

Total assets 18,200

Accounts payable 2,200 2,310

Accrued expenses 1,100 1,100

Short-term debt 1,700

Total current liabilities 5,000

Long-term debt 2,000 1,900

Deferred taxes 600 600


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Other liabilities 1,400 900


Total liabilities & equity 18,200

Sales revenue 20,000 21,000

Net income 1,500 1,650

Dividends 400 420

11. Historical data for VF Corp. are shown on the next worksheet in this file. For this

assignment, add two sets of calculations to this spreadsheet.

First, compute an estimated cost of capital. To do this, you should research in appropri

places to determine a cost of debt and a cost of equity. Then compute the WACC. To

determine these items, be sure to do the following:

Show several data points to support your estimated cost of debt and your

estimated beta. These data points could be, for example, numbers for

comparable companies.

In a column to the right of, and close to, your numbers, note the sources

for the major pieces of data you have used to make your estimates. Type

a short phrase into a cell in that column, on the same line as the number,

to provide the source for that number.

Show an estimate of the levered beta for VF. Go through the process we

did in class, to use betas from VF and from other similar companies inorder to find a median unlevered beta. Then lever that median back up

using VF's debt-to-equity ratio. Use this estimated levered beta as one of

your data points to estimate a beta for VF.

Show clearly how you calculated the weighted average cost of capital.

Second, for each year, calculate the appropriate ratios for all relevant accounts on the i

statement and the balance sheet. These ratios could be percents of sales, or percents

some other appropriate base.

Format these ratios as decimal fractions with two decimal places. In a column to the right of, and close to, your numbers, note the base for

your ratio: Percent of sales, or percent of debt, or percent of assets, or

whatever you used.

Include the ratios for the present values of the operating leases and for

dividends as a percent of sales.

Show these ratios in the same form as the income statement and balance

sheet, just like the examples which we looked at in class and which are


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posted on the course website.

You do not need to compute ratios for accounts which will not be forecast.

Don't forget to recompute the present values of the operating leases

by using a cell reference to your new cost of debt.


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VF CORPORATION

Consolidated Balance Sheets

December 2008 2009

In thousands

ASSETS

Current assets

Cash and equivalents 381,844 731,549


Inventories 1,151,895 958,639

Deferred income taxes 96,339 64,959

Other current assets 171,650 101,275

Total current assets 2,653,010 2,632,562Property, plant and equipment 642,727 614,178

Intangible assets 1,366,222 1,535,121

Goodwill 1,313,798 1,367,680

Other assets 458,111 324,322

Total assets 6,433,868 6,473,863

LIABILITIES AND STOCKHOLDERS EQUITY

Current liabilities

Short-term borrowings 53,580 45,453Current portion of long-term debt 3,322 203,179

Accounts payable 435,381 373,186

Accrued liabilities 519,899 473,971

Total current liabilities 1,012,182 1,095,789

Long-term debt 1,141,546 938,494

Other liabilities 722,895 626,295

Commitments and contingencies

Stockholders equity:

Preferred Stock, no shares outstanding 0 0

Common Stock 109,848 110,285

Additional paid-in capital 1,749,464 1,864,499

Accumulated other compr income (loss) (276,294) (209,742)

Retained earnings 1,972,874 2,050,109

Total equity attributable to VF Corporation 3,555,892 3,815,151

Noncontrolling interests 1,353 (1,866)

Total stockholders equity 3,557,245 3,813,285


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Total liabilities and stockholders equity 6,433,868 6,473,863

VF CORPORATIONConsolidated Statements of Income

Year Ended December 2008 2009

In thousands

Net sales 7,561,621 7,143,074

Royalty income 80,979 77,212

Total revenues 7,642,600 7,220,286

Costs and operating expenses

Cost of goods sold (4,283,680) (4,025,122)

Marketing, administrative and general expense (2,419,925) (2,336,394)Impairment of goodwill and intangible assets 0 (121,953)

Total costs and operating expenses (6,703,605) (6,483,469)

Operating income 938,995 736,817

Interest income 6,115 2,230

Interest expense (94,050) (85,902)

Other income (expense), net (2,969) 1,528

Income before income taxes 848,091 654,673

Income taxes (245,244) (196,215)

Net income 602,847 458,458Net (income) loss attrib to noncon interests (99) 2,813

Net income attributable to VF Corporation 602,748 461,271

Dividends paid 255,235 261,682

Invested Capital, operating approach


Inventories 1,151,895 958,639

Other current assets 171,650 101,275

Property, plant and equipment 642,727 614,178

Intangible assets 1,366,222 1,535,121

Goodwill 1,313,798 1,367,680

Other assets 458,111 324,322

Accounts payable (435,381) (373,186)

Accrued liabilities (519,899) (473,971)


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Other liabilities (722,895) (626,295)

Total invested capital 4,277,510 4,203,903

Invested Capital, financing approach

Short-term borrowings 53,580 45,453

Current portion of long-term debt 3,322 203,179

Long-term debt 1,141,546 938,494

Total stockholders equity 3,557,245 3,813,285

Cash and equivalents (381,844) (731,549)

Deferred income taxes (96,339) (64,959)

Total invested capital 4,277,510 4,203,903

NOPAT, operating approach

Operating income 736,817

Income taxes (196,215)

Reverse tax effects of nonoperating items:

Interest income 892

Interest expense (34,361)

Other income (expense), net 611

Change in deferred taxes 31,380

NOPAT 539,124

NOPAT, financing approach

Net income attributable to VF Corporation 461,271

Reverse nonoperating items, after tax:

Net (income) loss attrib to noncon interests (2,813)

Interest income (1,338)

Interest expense 51,541

Other income (expense), net (917)

Change in deferred taxes 31,380

NOPAT 539,124

Preliminary assumptions:Cost of debt 5%

Weighted average cost of capital (WACC) 8%

Adjustments for Operating Leases



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Future noncancelable lease payments:

First year 170,300 179,700

Second year 148,500 159,400

Third year 127,600 131,200

Fourth year 98,700 107,100

Fifth year 84,400 95,200

Thereafter 214,700 226,400

Present value at cost of debt 714,653 760,705

Implied interest at cost of debt 35,733 38,035

Invested capital, unadjusted for leases 4,277,510 4,203,903

Add present value of operating leases 714,653 760,705

Adjusted invested capital 4,992,163 4,964,608

NOPAT, unadjusted for leases 539,124

Add implied interest after tax 22,821

Adjusted NOPAT 561,946

Historical performance measures


NOPAT, adjusted for operating leases 561,946

Invested capital, adjusted for oper leases 4,992,163 4,964,608

ROIC 11.3%

FCF 589,500

EVA (NOPAT - capital charge) 162,573

EVA (Beginning capital x spread) 162,573

Operating profit margin (NOPAT as % of sales revenue) 7.8%

Asset intensity (Beginning invested cap as % of sales rev) 69.1%

ROIC = Operating margin x (1 / asset intensity) 11.3%

Investment rate (IR) = Increase in capital / NOPAT -4.9%

Sales growth rate -5.5%g = Growth rate in invested capital -0.6%

g = ROIC x IR -0.6%


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2010 2011 2012

792,239 341,228 597,461

773,083 1,120,246 1,222,345

1,070,694 1,453,645 1,354,158

68,220 106,717 140,515

121,824 166,108 135,104

2,826,060 3,187,944 3,449,583602,908 737,451 828,218

1,490,925 2,958,463 2,917,058 Treat this as an operating item.

1,166,638 2,023,460 2,009,757 Treat this as an operating item.

371,025 405,808 428,405

6,457,556 9,313,126 9,633,021

36,576 281,686 12,5592,737 2,744 402,873

510,998 637,116 562,638

559,164 744,486 754,142

1,109,475 1,666,032 1,732,212

935,882 1,831,781 1,429,166

550,880 1,290,138 1,346,018

0 0 0

107,938 110,557 110,205

2,081,367 2,316,107 2,527,868

(268,594) (421,477) (453,895)

1,940,508 2,520,804 2,941,447

3,861,219 4,525,991 5,125,625

100 (816) 0

3,861,319 4,525,175 5,125,625


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6,457,556 9,313,126 9,633,021

2010 2011 2012

7,624,599 9,365,477 10,766,020

77,990 93,755 113,835

7,702,589 9,459,232 10,879,855

(4,105,201) (5,128,602) (5,817,880)

(2,574,790) (3,085,839) (3,596,708)(201,738) 0 0 Treat this as an operating item.

(6,881,729) (8,214,441) (9,414,588)

820,860 1,244,791 1,465,267

2,336 4,778 3,353

(77,738) (77,578) (93,605)

4,754 (7,248) 46,860

750,212 1,164,743 1,421,875

(176,700) (274,350) (335,737)

573,512 890,393 1,086,138(2,150) (2,304) (139) Treat this as a financial item.

571,362 888,089 1,085,999

264,281 285,722 333,229

773,083 1,120,246 1,222,345

1,070,694 1,453,645 1,354,158

121,824 166,108 135,104

602,908 737,451 828,218

1,490,925 2,958,463 2,917,058

1,166,638 2,023,460 2,009,757

371,025 405,808 428,405

(510,998) (637,116) (562,638)

(559,164) (744,486) (754,142)


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(550,880) (1,290,138) (1,346,018)

3,976,055 6,193,441 6,232,247

36,576 281,686 12,559

2,737 2,744 402,873

935,882 1,831,781 1,429,166

3,861,319 4,525,175 5,125,625

(792,239) (341,228) (597,461)

(68,220) (106,717) (140,515)

3,976,055 6,193,441 6,232,247

820,860 1,244,791 1,465,267

(176,700) (274,350) (335,737)

934 1,911 1,341

(31,095) (31,031) (37,442)

1,902 (2,899) 18,744

(3,261) (38,497) (33,798)

612,640 899,925 1,078,375

571,362 888,089 1,085,999

2,150 2,304 139

(1,402) (2,867) (2,012)

46,643 46,547 56,163

(2,852) 4,349 (28,116)

(3,261) (38,497) (33,798)

612,640 899,925 1,078,375

2010 2011 2012


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188,200 274,900 298,000

157,300 220,100 256,200

130,700 181,700 213,500

109,100 154,400 164,400

94,500 116,400 136,400

215,000 254,300 277,900

759,054 1,026,396 1,150,118

37,953 51,320 57,506

3,976,055 6,193,441 6,232,247

759,054 1,026,396 1,150,118

4,735,109 7,219,837 7,382,365

612,640 899,925 1,078,375

22,772 30,792 34,504

635,411 930,717 1,112,879

2010 2011 2012

635,411 930,717 1,112,879

4,735,109 7,219,837 7,382,365

12.8% 19.7% 15.4%

864,911 (1,554,012) 950,351

238,243 551,908 535,292

238,243 551,908 535,292

8.2% 9.8% 10.2%

64.5% 50.1% 66.4%

12.8% 19.7% 15.4%

-36.1% 267.0% 14.6%

6.7% 22.8% 15.0%-4.6% 52.5% 2.3%

-4.6% 52.5% 2.3%


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