Income statement of BrandCo, a consumer products company is as follows. Determine net operating profit less adjusted taxes (NOPLAT) for years 1 to 6. Assume an operating tax rate of 30 percent. Determine free cash flow for years 1 to 6. BrandCo: Income Statement and Reorganized Balance Sheet
Income statement ($ million)
Today Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Revenues 3,777.1 4,041.5 4,304.2 4,583.9 4,859.0 5,126.2 5,382.5
Operating costs (3,245.1) (3,435.2) (3,658.5) (3,896.3) (4,130.1) (4,357.3) (4,575.1)
Depreciation (82.9) (97.0) (103.3) (110.0) (116.6) (123.0) (129.2)
Operating profits 449.1 509.2 542.3 577.6 612.2 645.9 678.2
Interest (14.0) (14.0) (14.0) (14.0) (14.0) (14.0) (14.0)
Earnings before taxes 435.1 495.2 528.3 563.5 598.2 631.9 664.2
Taxes (130.5) (148.6) (158.5) (169.1) (179.5) (189.6) (199.2)
Net income 304.6 346.6 369.8 394. 418. 442. 464.9
1Accounts payable has been netted against inventory to determine operating working capital.
Reorganized balance sheet
Today Year 1 Year 2 Year 3 Year 4 Year 5 Year 6
Operating working capital1 188.9 202.1 215.2 229.2 242.9 256.3 269.1
Property and equipment 1,510.8 1,616.6 1,721.7 1,833.6 1,943.6 2,050.5 2,153.0

Invested capital 1,699.7 1,818.7 1,936.9 2,062.8 2,186.5 2,306.8 2,422.1
Debt 280.5 280.5 280.5 280.5 280.5 280.5 280.5

Shareholders' equity 1,419.2 1,538.2 1,656.4 1,782.3 1,906.0 2,026.3 2,141.6

Invested capital 1,699.7 1,818.7 1,936.9 2,062.8 2,186.5 2,306.8

2,422.1
2. BrandCo currently has 65.6 million shares outstanding. If the BrandCo’s shares are trading at $57 per share, what is the company’s market capitalization (value of equity)? Assuming the market value of debt equals today’s book value of debt, what percentage of the company’s value is attributable to debt, what percentage is attributable to equity? When would the market value of debt not equal to the book value? Using these weights, compute the weighted average cost of capital. Assume the pre‐tax cost of debt is 8 percent, the cost of equity is 12 percent, and the marginal tax rate is 30 percent.
3. Using the next five years of free cash flow computed in Question 1, an estimated continuing value at the end of year 5, and the weighted average cost of capital computed in Question 2, estimate BrandCo’s enterprise value. Assume a long-term growth rate in cash flows of 5 percent and a return on new invested capital (RONIC) of 15 percent. (BrandC0 currently has no non-operating assets.)
4. Assuming the market value of debt equals today’s book value of debt, what is the intrinsic equity value for BrandCo? What is the value per share? Does it differ from the share price used to determine the cost of capital weightings in Question 2?
5. What are the three components required to calculate economic profit? Determine BrandCo‘s economic profit in years 1 to 6?
6. Using economic profit in years 1 to 5 calculated in Question 5, an estimated continuing value at the end of year 5, and the weighted average cost of capital computed in Question 2, value BrandCo using the economic‐profit‐based key value driver model. Assume a long-term growth rate in cash flows of 5 percent and RONIC of 15 percent. Should discounted economic profit be greater than, equal to, or less than discounted free cash flow. Hint: Prior year invested capital must be used to determine ROIC and capital charge.