Refer to the Excerpts from the 2019 Financial Statements of GW, Inc. (not its real name). These excerpts are not attached. You can find them on Canvas in the “Project 1” folder within Files. (it’s an Excel Worksheet).
These are the actual financial statements (cash flow statements) for a company over the period 2017- 2019. Your job is to pretend that it is the beginning of 2017 and that these are FORECASTED financial statements (prepared according to GAAP). We’re going to be using these “forecasted” statements to calculate valuations.
- Based on the Financing Section of the “forecasted” cash flow statements, what types of financial claims (financial liabilities and various claims on equity) does GW have? Give as complete a list as possible (e.g., common stock, … ). You don’t have to attach any numbers to the claims.
Financial claims include common stock, convertible, borrowings, collateralized lease repayments, convertible note hedges, warrants, investments by noncontrolling interests.
Initially, suppose Free Cash Flow (to all) is defined as Cash From Operations plus Cash from Investing, (both as defined by GAAP). Suppose that GW has a discount rate (weighted average cost of capital) of 8%.
- What is the present value of the three “forecasted years” of Free Cash Flow? That is, suppose it is the end of 2016 (or beginning of 2017). All cash flows occur at the end of the year. Therefore, the 2017 cash flow is one year away, etc.
- Now let’s work on adjusting the numbers. One of the most common adjustments is to move the after-tax cost of interest out of the Operating Cash Flow number.
- Do this for GW for each of the three years. Use a 20% tax rate.
- What evidence is there to suggest that interest might not be tax-deductible for GW?
4.Next, let’s adjust the cash flow statement numbers for GW to reflect the economic impact of non- cash investing and financing activities or non-cash operating and financing activities. Include your modification for interest cost from above as well.
- Re-express the Statement of cash flows as follows (I don’t need every line item from the original cash flow statement)
- Calculate the Present Value of the Modified Free Cash Flow Numbers
- Of course, the valuation of GW would also include a “terminal value” or continuation value. Suppose that the terminal value is calculated by assuming the forecasted FCF for year 2020 continues as a perpetuity (with no growth).
- How big does FCF have to be in year 2020 (and each year onward) such that the Overall Enterprise Value of GW is 50 Billion dollars (as assessed at the beginning of 2017)?