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Teton Valley Case

Teton Valley Case. Free Cash Flows. Free Cash Flow. For each future year you want to calculate: FCF = EBIT(1 – T c ) (no debt tax shields calculated) + Depr & Amort . (adjust for non-cash expenses) - Capital Expenditures (a cash flow not

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Teton Valley Case

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  1. Teton Valley Case Free Cash Flows

  2. Free Cash Flow • For each future year you want to calculate: • FCF = EBIT(1 – Tc)(no debt tax shields calculated) + Depr & Amort. (adjust for non-cash expenses) - Capital Expenditures (a cash flow not part of EBIT) - Changes in NWC (almost, to adjust for accruals.)

  3. Teton Valley Corporation • Sales growth at 10% for 5 years then 4% in perpetuity. • CGS at 65% of sales. • SGA at $500,000 + 4.5% of sales. • Net Fixed assets grow at 5% per year for next 5 years. • Depreciation is 20% of beginning of year net fixed assets. • NWC is $80,000, grows with sales. • FCFs grow at 4% in perpetuity after 2011.

  4. Forecasting Earnings

  5. The Pro Forma Exercise • For a complete pro forma analysis we also need to forecast the balance sheet. • Two issues for this example: • The balance sheet is so simple it is a trivial exercise. • We need to make some assumptions. About what?

  6. Forecasting the Balance Sheet • What did I assume? • Are there any issues? • Complete the forecast on the spreadsheet.

  7. From Earnings To Free Cash Flow FCF = EBIT(1-Tc) + Depr. - ∆NWC – Cap Ex. So: 2007 2007 2008 2008 2007 2008 2009 2010 2011 FCF: 791,175 912,418 1,046,141 1,193,610 1,356,219

  8. Free Cash Flow • We start with earnings before interest and taxes. Why? • Before interest because financing costs should not be taken out and we are supposing its an all equity firm. • Before taxes to make it easier to ignore the debt tax shields that will be included if you use actual taxes paid or provision for income taxes.

  9. Why is it almost -NWC? • Recall there are two reasons: • 1st – one of the NWC accounts is the current portion of long term debt. We leave out changes in the current portion of long term debt from cash flow since this is a financing cash flow. • 2nd – a level of the cash account is necessary only up to a balance required for liquidity. Increases in the cash account above this minimum could be paid out as dividends or used to pay down principal without reducing the effectiveness of the firm going forward. Thus increases in cash above the minimum are not to be subtracted to find FCF so should not be counted in the change to NWC.

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