You have reformulated the Imber Aedax Company’s most recent financial statements and extracted the following information:
Year ended 31 Dec 2019 | $ million |
Sales | 35,200 |
Interest expense minus interest income | 291 |
Earnings before tax | 13,168 |
Tax expense | 2,384 |
Comprehensive Income (CE) | 11,809 |
As at 31 Dec 2019 | $ million |
Net operating working capital (OWC) | 936 |
Net non-current operating assets (NNCOA) | 42,287 |
Net financial obligations (NFO) | 11,906 |
a) Calculate NOA (net operating assets) and CSE (common shareholders’ equity) at the end of 2019.
b) Using the 2019 effective tax rate, calculate NFE (net financial expense) and OI (operating income or NOPAT) for the year 2019.
2020 | 2021 | 2022 | thereafter | |
Sales growth | 10% | 7% | 4% | 3% |
OI / sales | 30% | 25% | 20% | 18% |
Previous year OWC / this year's sales | 2.2% | 2% | 2% | |
Previous year NNCOA / this year's sales | 105% | 100% | 98% | |
NFO / NOA | 27.5% | 27.5% | 27.5% | 27.5% |
c) Predict sales and OI for the years 2020 to 2022. Predict NOA, NFO and CSE for the years 2020 to 2022.
d) Assuming that the 2019 tax rate continues to apply in future
and that the cost of debt before tax shield benefit is 2%, find the
after-tax cost of debt.
Assuming that the cost of equity is 4.9% and using information
given in the forecast table above, calculate the WACC (weighted
average cost of capital). Round it to the nearest one tenth of a
percent.
Assuming that NFE equals previous year NFO times the after-tax cost
of debt, calculate NFE and CE for the years 2020 to 2022.
e) Calculate predicted AE (abnormal earnings), AOI (abnormal operating income or abnormal NOPAT) and FCF (free cash flow) for the years 2020 to 2022.
Tax rate = Tax expense*100/Earnings before tax = 2,384million*100/13,168million = 18.1%
Cost of debt after tax shield = cost of debt before tax shield*(1-tax rate) = 2%*(1-0.181) = 2%*0.819 = 1.638%
Value of equity (VOE)= OWC+NNCOA-NFO = 936million+42,287million-11,906million = 31,317million
WACC = [(cost of equity*VOE)+(Cost of debt after tax shield*NFO)]/(OWC+NNCOA) = [(4.9%*31,317million)+(1.638%*11,906million)]/(936million+42,287million) = (1,534.533million+195.02028million)/43,223million = 1,729.55328million/43,223million = 4%
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