Northwest Chemical Case

a. The AFN equation can be written as:

(assets/sales)*ChangeInSales - (liab/sales)*ChangeInSales - ProfitMargin*SalesInComingYear)*(1-DividendPayoutRatio). Using the following data, an AFN of $180.9 million is calculated.

b. When the percentage of sales method is used and a second "pass" is done to take into account the effect of financing (including increased interest payments due to the debt that is taken on to finance the additional funds needed), the following financial statements are derived from NWC's operations in 1999:

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gnificantly over 1998, but is only slightly higher than the industry as a whole. The times interest earned figure falls from 1998 to 1999, and is half that of the industry, but again, this can be attributed to the company's new debt. More troublesome is the return on invested capital, which is well below the industry as a whole. However, the current ratio, although it should fall, remains above 2:1, but below the industry average. By using debt financing, the company's fortunes are expected to fall when measured strictly as a function of profit margin. However, return on equity increases (since debt is now a larger part of the company's financial structure), and the payout ratio remains the same, so owners may actually be pleased with the performance. e. Free cash flow is equal to the cash flows from operations less dividends (retained earnings) less capital expenditures. In this case, using the data from step b, this equals 40.78 minus 125 (the increase in fixed assets), or -84.22 million. f. The following formula provides the present value of the horizon value: [Horizon Free Cash Flow * (1 + growth rate)] / (WACC - growth rate). This yields a present horizon value of $679.35 million. In addition, the cash flows for 19

Category: Economics - N