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Business & Finance
Price: $5 USD

Question description

Aqua Packaging Corp. makes industrial packaging equipment used primarily by automobile manufacturers to produce protective covering for new luxury automobiles being shipped to dealers across the US by train and by truck.  It also makes industrial packaging equipment for other consumer goods companies.  Below you will find balance sheets for Aqua as of December  31, 2014 and December   31, 2013 and an income statement for the fiscal year ending December 31, 2014 (“fiscal 2014.”)  Both statements have been prepared according to GAAP; amounts shown are in millions of US dollars.

Balance Sheet (for year ending December  31, 2014)

Cash  10.3  Trade payables  91.7

Marketable securities  94.6  Taxes payable  14.5

Accounts receivable  85.7  Current portion, LT debt  35.0

Inventory  112.3

  Current assets    302.9    Current liabilities    141.2

Net property, plant and equipment    621.4  Long-term debt  325.0

Investments in subsidiaries     81.3  Deferred tax payable    71.2

Patents, other intangibles    14.2  Shareholders’ equity    482.4

  Total assets    1,019.8  Total liabilities and Sh. Equity  1,019.8

Balance Sheet (for year ending December 31, 2013)

Cash  14.7  Trade payables  81.4

Marketable securities    112.6  Taxes payable    1.3

Accounts receivable  78.6  Current portion, LT debt  10.0

Inventory  114.9

  Current assets   320.8    Current liabilities    92.7

Net property, plant and equipment    620.0  Long-term debt    360.0

Investments in subsidiaries     81.3  Deferred tax payable    71.2

Patents, other intangibles    14.2  Shareholders’ equity    512.4

  Total assets    1,036.3  Total liabilities and Sh. Equity  1,036.3

Income Statement

Revenues  924.2

Cost of goods sold  691.5

Other operating expenses  171.4

EBIT    61.3

Interest income    3.6

Interest expense       19.5

EBT    45.4

Income taxes    14.1

Net income    31.3

Other data:

Depreciation expense included in 2014 income was $6.7 million.  Capital expenditures in fiscal 2014 were $8.1 million, and Aqua paid dividends of $61.3 million in that year.

Aqua’s debt consists of 2 bond issues:  $75 million with a coupon of 7% (maturing in 2025) and $250 million with a coupon of 5% (maturing in 2030.).  Aqua would pay a coupon of 8.5% on a bond issue today.

For forecasting, assume Aqua pays a tax rate of 34% on EBIT.

In today’s market, investors can earn a 4% rate of return on a short-term US Treasury note and 6% on a long-term US Treasury bond.  Last year, the S&P 500 earned a rate of return of 14.5%.

Aqua’s stock is deemed to have a BETA of 1.1, and you would require a 7% risk premium for an investment in the market portfolio. 

The macroeconomic outlook for the packaging equipment industry:  the industry grows revenues in line with US GDP, which is expected to grow (on average) 3.5% over the next 7 years.  You believe there is a 100% probability of a recession during that period; industry revenues typically drop 10% in a recessionary year.

Cost structure of Aqua:  COGS in fiscal 2014 was 46% fixed and 54% variable.  Other operating expenses were 34% fixed and 66% variable.  For your forecast, assume that fixed costs remain constant for the entire forecast period.  Also assume that variable costs remain at the same ratio to revenues as in fiscal 2014.  Capital expenditures are forecast at $7.5 million for fiscal 2015, growing at 3% per annum thereafter.


1.   Produce a cash flow statement for Aqua for the fiscal year 2014.

2.  Determine Free Cash Flow (FCF) for Aqua in fiscal 2014.

3.  Produce a 7-year forecast of revenue for Aqua, beginning with fiscal year 2015 (which began January  1, 2015).  Explain the details of your forecast.

4.  Produce a 7-year forecast of COGS and other operating expenses.

5.  Assume that the forecasts in #3 and #4 above are CASH revenues and expenses; produce a 7-year forecast of Free Cash Flow for Aqua.

6.  Determine an appropriate horizon (terminal) value for Aqua’s FCF; use a constant growth rate of 2%.

7.  What is your estimate of Enterprise Value for Aqua as of January 1, 2015?

8.  What is your estimate of the value of Aqua’s equity capital as of the same date?

9.  Identify THREE key drivers of Enterprise Value for Aqua; explain why these three are critical to determination of Aqua’s Enterprise Value.

10.  Prepare sensitivity analysis on each of the 3 key drivers that you chose in #9.

Tutor Answer

(Top Tutor) Daniel C.
School: University of Virginia
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