ACC306 Individual Assignment12 : Solution Essays

Question:

Two calculation questions, one is from Chapter 4, the other is from chapter 11, 10 marks each, in total 20 marks.

Due time is at 5pm on Friday in week 10 12/01/2018, no extension will be given. One day late, 10% deduction on your assignment until zero.

Similarity rate must be lower than 20%, otherwise you will receive penalty, over than 40%, you will receive zero mark.

Use a required return of 9 percent to calculate both the enterprise value and equity value for General Mills at the beginning of 2006 under two forecasts for long-run cash flows:

Free cash flow will remain at 2009 levels after 2009.

Free cash flow will grow at 3 percent per year after 2009.

General Mills had 369 million shares outstanding at the end of 2005, trading at $47 per share. Calculate value per share and a value-to-price ratio under both scenarios.

The exercise involves calculating free cash flows, discounting them to present value, then adding the present value of a continuing value. For part (a) of the question, the continuing value has no growth:

Answer:

Chapter 4: A Discounted Cash Flow Valuation: General Mills, Inc.

Part (A)

*Free Cash Flows from 2010-∞ = 2009/9%

= 22322.22

Part (B)

(in million $)
Year	Cash Flow from Operations	Cash Investment in Operations	Free Cash Flows	PV @ 9%	PV of Free Cash Flows
2006	2014	300	1714	0.917	1572.48
2007	2057	380	1677	0.842	1411.50
2008	2095	442	1653	0.772	1276.42
2009	2107	470	1637	0.708	1159.69
*2010-∞			28101.83	0.650	18264.26
* Growth Rate = 3% Perpetually
			Enterprise value			23684.35
			Value of Debt			6192
			Equity Value			17492.35
			No. of shares outstanding(Millions)			369
			Value per Share			47.40
			Price			47
			Value-to-price Ratio			1.01

*Free Cash Flows from 2010-∞ = 1653(1+0.03)/9%-3%

= 28101.83

Chapter 11: Free Cash Flow for Kimberly-Clark Corporation (in Million $)
	2007	2006
Operating assets	18,057.00	16,796.20
Operating liabilities	6,011.80	5,927.20
Working Capital	12,045.20	10,869.00
Financial assets	382.70	270.80
Financial obligations	6,496.40	4,395.40
Operating income (after tax)	2,740.10
Net financial expense (after tax)	147.10

Part (A)

Calculation of Free Cash Flows (Method I) (In Million $)
Operating income (after tax)	2,740.10
less: Net Financial Expenses (after tax)	147.10
Less: Changes in Working Capital	1,176.20
Add: Proceeds from Financial Obligations	2,101.00
Less: CAPEX	111.90
Free Cash Flows of Firm	3,405.90

Calculation of Free Cash Flows (Method II) (In Million $)
?Cash Balance	0.00
Add: Net Pay-out to Shareholders	3,405.90
Free Cash Flow	3,405.90

Part (B)

Calculation of Free Cash Flows (In Million $)
Cash Flow from Operations	2429
± Cash flow from Investing Activity	-842
± Cash Flow from Financing Activity	0
Add: Net Payment to Debt holders	90.28
Add: Net Pay-out to Shareholders	0
Free Cash Flows	1677.28

References:

Johann, R 2008, The Free Cash Flow Approach, GRIN Verlag, Germany.

Christy, G. C. 2009, Free Cash Flow: Seeing Through the Accounting Fog Machine to Find Great Stock, John Wiley & Sons.

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