Reeby Sports Case
Corporate Finance Case 1
1. To calculate the present value of future cash flow in 2013, we first calculate the free cash flow between
2014-2020:
Table 1: Free cash flow of 2014-2020 (in $million)
After-tax profits
Depreciation
Gross investment in fixed assets
Investment in net working capital
Free cash flow
2014
2015
2016
2017
2018
2019
2020
5.25
2.40
5.70
3.10
3.00
3.12
3.40
3.17
4.35
3.26
6.00
3.44
7.60
3.68
(4.26)
(10.50)
(3.34)
(3.65)
(4.18)
(5.37)
(6.28)
(1.39)
(0.60)
(0.28)
(0.42)
(0.93)
(1.57)
(2.00)
2.00
-2.30
2.50
2.50
2.50
2.50
3.00
Discount these cash flow into 2013 at 10%:
PV???ℎ ???? = 8.01
Then we calculated the horizon value of 2020, of which there are two types of calculation:
(a)
Suppose Reeby Sports will lose in the market competition and has no PVGO, then its 2020 horizon value will equal to:
PVH =
7.60
= 76.00
0.10
In this way, the present value of 2013 will be:
PV2013 = 8.01 +
76.00
= 47.00
(1 + 0.10)7
(b)
Suppose Reeby Sports will still win in its market competition in 2020, then its 2020 horizon value will equal to its free cash flow of 2021 over cost of capital minus growth rate.
To calculate its free cash flow of 2021, we first calculate the book value of equity of Reeby Sports:
Table 2: Book value of equity of 2014-2021 (in $million)
Book value of equity at the beginning of the year
Gross investment in fixed assets Investment in net working capital Depreciation
Book value of equity at the end of the year
2014
2015
2016
2017
2018
2019
2020
2021
40.71
43.96
51.96
52.46
53.36
55.21
58.71
63.31
4.26
10.50
3.34
3.65
4.18
5.37
6.28
1.39
0.60
0.28
0.42
0.93
1.57
2.00
(2.40)
(3.10)
(3.12)
(3.17)
(3.26)
(3.44)
(3.68)
43.96
51.96
52.46
53.36
55.21
58.71
63.31
With the book value of equity of 2021, we can calculate its net income:
Net income = Equity × ROE = 63.31 × 0.12 = 7.60
Retained profits = 7.60 × 0.60 = 4.56
then we can notice that:
Net capital spending +
1. To calculate the present value of future cash flow in 2013, we first calculate the free cash flow between
2014-2020:
Table 1: Free cash flow of 2014-2020 (in $million)
After-tax profits
Depreciation
Gross investment in fixed assets
Investment in net working capital
Free cash flow
2014
2015
2016
2017
2018
2019
2020
5.25
2.40
5.70
3.10
3.00
3.12
3.40
3.17
4.35
3.26
6.00
3.44
7.60
3.68
(4.26)
(10.50)
(3.34)
(3.65)
(4.18)
(5.37)
(6.28)
(1.39)
(0.60)
(0.28)
(0.42)
(0.93)
(1.57)
(2.00)
2.00
-2.30
2.50
2.50
2.50
2.50
3.00
Discount these cash flow into 2013 at 10%:
PV???ℎ ???? = 8.01
Then we calculated the horizon value of 2020, of which there are two types of calculation:
(a)
Suppose Reeby Sports will lose in the market competition and has no PVGO, then its 2020 horizon value will equal to:
PVH =
7.60
= 76.00
0.10
In this way, the present value of 2013 will be:
PV2013 = 8.01 +
76.00
= 47.00
(1 + 0.10)7
(b)
Suppose Reeby Sports will still win in its market competition in 2020, then its 2020 horizon value will equal to its free cash flow of 2021 over cost of capital minus growth rate.
To calculate its free cash flow of 2021, we first calculate the book value of equity of Reeby Sports:
Table 2: Book value of equity of 2014-2021 (in $million)
Book value of equity at the beginning of the year
Gross investment in fixed assets Investment in net working capital Depreciation
Book value of equity at the end of the year
2014
2015
2016
2017
2018
2019
2020
2021
40.71
43.96
51.96
52.46
53.36
55.21
58.71
63.31
4.26
10.50
3.34
3.65
4.18
5.37
6.28
1.39
0.60
0.28
0.42
0.93
1.57
2.00
(2.40)
(3.10)
(3.12)
(3.17)
(3.26)
(3.44)
(3.68)
43.96
51.96
52.46
53.36
55.21
58.71
63.31
With the book value of equity of 2021, we can calculate its net income:
Net income = Equity × ROE = 63.31 × 0.12 = 7.60
Retained profits = 7.60 × 0.60 = 4.56
then we can notice that:
Net capital spending +