Income Statement for the Year Ending December 31 (Millions of Dollars)

2016
Net Sales $ 800.0
Costs (except depreciation) $ 576.0
Depreciation $ 60.0
Total operating costs $ 636.0
Earning before int. & tax $ 164.0
Less interest $ 32.0
Earning before taxes $ 132.0
Taxes (40%) $ 52.8
Net income before pref. div. $ 79.2
Preferred div. $ 1.4
Net income avail. for com. div. $ 77.9
Common dividends $ 31.1
Addition to retained earnings $ 46.7

Number of shares (in millions) 10

Dividends per share $ 3.11

Balance Sheets for December 31 (Millions of Dollars)

Assets 2016 Liabilities and Equity
Cash $ 8.0 Accounts Payable
Short-term investments 20.0 Notes payable
Accounts receivable 80.0 Accruals
Inventories 160.0 Total current liabilities
Total current assets $ 268.0 Long-term bonds
Net plant and equipment 600.0 Preferred stock
Common Stock
Total Assets $ 868.0 (Par plus PIC)

Retained earnings
Common equity
Total liabilities and equity

Projected ratios and selected information for the current and projected years are shown below.

Inputs Actual Projected Projected Projected

12/31/2016 12/31/17 12/31/18 12/31/19
Sales Growth Rate 15% 10% 6%
Costs/Sales 72% 72% 72% 72%
Depreciation/(Net PPE) 10% 10% 10% 10%
Cash/Sales 1% 1% 1% 1%
(Acct. Rec.)/Sales 10% 10% 10% 10%
Inventories/Sales 20% 20% 20% 20%
(Net PPE)/Sales 75% 75% 75% 75%
(Acct. Pay.)/Sales 2% 2% 2% 2%
Accruals/Sales 5% 5% 5% 5%
Tax rate 40% 40% 40% 40%
Weighted average cost of capital (WACC) 10.5% 10.5% 10.5% 10.5%

a. Forecast the parts of the income statement and balance sheets necessary to calculate free cash flow.

Partial Income Statement for the Year Ending December 31 (Millions of Dollars)
Actual Projected Projected Projected
Income Statement Items 12/31/2016 12/31/17 12/31/18 12/31/19
Net Sales $800.0 $920.0 $1,012.0 $1,072.7
Costs (except depreciation) $576.0 $662.4 $728.6 $772.4
Depreciation $60.0 $69.0 $75.9 $80.5
Total operating costs $636.0 $731.4 $804.5 $852.8
Earning before int. & tax $164.0 $188.6 $207.5 $219.9

Partial Balance Sheets for December 31 (Millions of Dollars)

Actual Projected Projected Projected
Operating Assets 12/31/2016 12/31/17 12/31/18 12/31/19
Cash $8.0 $9.2 $10.1 $10.7
Accounts receivable $80.0 $92.0 $101.2 $107.3
Inventories $160.0 $184.0 $202.4 $214.5
Net plant and equipment $600.0 $690.0 $759.0 $804.5

Operating Liabilities
Accounts Payable $16.0 $18.4 $20.2 $21.5
Accruals $40.0 $46.0 $50.6 $53.6

b. Calculate free cash flow for each projected year. Also calculate the growth rates of free cash flow each
year to ensure that there is constant growth (i.e., the same as the constant growth rate in sales) by the end of
the forecast period.
Actual Projected Projected Projected
Calculation of FCF 12/31/2016 12/31/17 12/31/18 12/31/19
Operating current assets $248.0 $285.2 $313.7 $332.5
Operating current liabilities $56.0 $64.4 $70.8 $75.1
Net operating working capital $192.0 $220.8 $242.9 $257.5
Net PPE $600.0 $690.0 $759.0 $804.5
Total net operating capital $792.0 $910.8 $1,001.9 $1,062.0
NOPAT $98.4 $113.2 $124.5 $131.9
Investment in total net operating capital na $118.8 $91.1 $60.1
Free cash flow na -$5.6 $33.4 $71.8
Growth in FCF na na -692.1% 115.1%
Growth in sales 15.0% 10.0% 6.0%
 8/3/15

2016
$ 16.0
40.0
40.0
$ 96.0
$ 300.0
$ 15.0

$ 257.0
200.0
$ 457.0
$ 868.0

below.

Projected
12/31/20
6%
72%
10%
1%
10%
20%
75%
2%
 5%
40%
10.5%

e free cash flow.

Projected
12/31/20
$1,137.1
$818.7
$85.3
$904.0
$233.1

Projected
12/31/20
$11.4
$113.7
$227.4
$852.8

$22.7
$56.9

free cash flow each

n sales) by the end of

Projected
12/31/20
$352.5
$79.6
$272.9
$852.8
$1,125.7
$139.9
$63.7
$76.1
6.0%
6.0%