Coroporate Finance

1.For the past three years, results for Jones plc have been as follows (all figures in £m):

P&L Account    2010    2011    2012
Sales    100    110    125
Cash operating expenses    40    45    50
Depreciation    5    6    7
Total operating expenses    45    51    57
Operating profit    55    59    68
Taxes on operating profit    16.5    17.11    19.72
NOPAT    38.5    41.89    48.28
Net interest charges    2.8    2.485    2.862
Profit after tax    35.7    39.405    45.418

Dividend    20    22    25

Year end Balance Sheet    2010    2011    2012
Fixed assets, gross    150    180    195
Depreciation balance    20    26    33
Net Fixed assets    130    154    162
Current Assets    20    22    25
Current Liabilities    10    11    12
Long term loans    50    57.595    47.177
Net Assets    90    107.405    127.823
Total equity    90    107.405    127.823

You now wish to value the firm, as at 1st January 2013, using the Free Cash Flow (FCF) method.  You decide to do this by first establishing what the free cash flows were for 20011-12, and then forming a judgement on what the value drivers are likely to be going forward.

a) What were the actual FCF figures for 20011 and 2012?   (5 marks)
b) What were the following value drivers for 2011 and 2012: Realised sales growth; operating margin; tax rate; opening fixed assets per £1 of sales; opening net current assets per £1 of sales? (5 marks)
c) You estimate that in 2013 sales will be £135m, and that sufficient investment in net current assets and fixed assets has been made in 2012 to support these sales.  The cash tax rate will fall to 28% in 2013, but operating margin before tax will be the same as the 2012 margin.  Beyond 2013, the firm’s sales will grow at 5% and the rate of asset investment will be maintained at the level implied by the end 2012 balance sheet values and the 2013 forecast sales figure (i.e. you believe the relevant asset turnover ratios can be used to forecast the required fixed and net current asset bases).  Value the firm (i.e. find the enterprise value) using the FCF method using a weighted average cost of capital of 8%. What is the implied equity value at 1.1.13?