Final Finance Project

timer Asked: Jun 14th, 2015

Question Description

FIN Project.docx

The project should be completed by groups of no more than TWO (2) students; you may work alone if you choose. Both members of each group will receive the same grade, and I expect full participation in the project by each team member; I encourage team members to report any lack of participation by a teammate to me in a separate email, which will remain confidential. Please submit your finished product to me at on or before midnight, June 14.
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 Current assets Net property, plant and equipment 112.3 302.9 621.4 Investments in subsidiaries 81.3 Patents, other intangibles 14.2 Total assets 1,019.8 Current liabilities Long-term debt Deferred tax payable Shareholders’ equity 141.2 325.0 71.2 482.4 Total liabilities and Sh. Equity 1,019.8 Balance Sheet (for year ending December 31, 2013) Cash Marketable securities Accounts receivable Inventory Current assets Net property, plant and equipment 14.7 Trade payables 81.4 112.6 Taxes payable 1.3 78.6 10.0 114.9 320.8 620.0 Investments in subsidiaries 81.3 Patents, other intangibles 14.2 Total assets Current portion, LT debt 1,036.3 Current liabilities Long-term debt Deferred tax payable Shareholders’ equity 92.7 360.0 71.2 512.4 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. YOUR ASSIGNMENT: 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 7year 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.

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