Background:
You have been provided the Balance Sheet and Income Statement for Winnebago as of August 25, 2006. The value of the stock of a company can be recognized by computing the present value of the cash flows produced by the company and available to stock holders. Winnebago has historically repurchased big amounts of stock with their excess cash flow. Such stock repurchases have similar impact as dividends so we will suppose that Winnebago will pay out all available cash flows above some minimum level required for Net Working Capital in dividends in the future. As we have shown earlier in the semester if Winnebago reinvests such cash flows in projects that earn the return the market requires for Winnebago, the value of the stock will not change, so this supposition is proper.
The spreadsheet “projection template WGO” contains a summarized income statement and a projection for 2007. You must use this as the start of a valuation template you will need to create to calculate the cash flow projections required to value the common stock of Winnebago Corporation as of 8/25/2006. Use this spreadsheet to answer the given questions. Print your valuation spreadsheet and comment on the whether or not you agree with the financial assumptions you were given for this valuation.
1) Use the excel spreadsheet to project the total income for Winnebago from assumptions regarding key revenue and expense items. Use the given assumptions to compute the projected net income, operating cash flow and investment cash flow for Winnebago for 2007 through 2011.
Sales Growth through 2011 14.0%
Sales Growth after 2011 7.0% forever
Variable Costs as a % of Sales 84.0%
Fixed Costs as a % of Sales 4.0%
Depreciation Expense and Investment in Property Plant and Equipment will grow at similar rate as Sales.
As we suppose they pay out all excess cash Financial Income will be zero in the future.
Tax Rate: 35.0%
2) Compute the Operating Cash flows from 2007 – 2011 by using the indirect technique to add back depreciation. Suppose that depreciation will grow at similar rate as sales.
3) Suppose you can reduce the cash on hand and the company will require holding Net Working Capital (comprising cash) equivalent to 4% of the next year’s sales going forward. This will result in a very large reduction in NWC in 2007. You will as well need to project 2012 Sales to compute the NWC in 2011.
4) Compute the Total Cashflows from 2007 – 2011. Suppose that the company will require increasing their annual investment in fixed assets (representing new equipment) at similar rate as sales.
5) Compute the price of Winnebago stock (Winnebago has no debt so this is the market value of the firm divided by the number of common shares outstanding.) from the cash flows you calculated above. Assume Winnebago has a Beta of 2.01 the Market Return is expected to be 10.5% and the Risk Free rate is 3.5%. Assume there are 31,143,000 shares outstanding.
6) Go to the internet (Try Smartmoney.com) and compare your price to the market price of Winnebago stock on August 25, 2006. If your price per share is not close to this value, check your projection.
7) Comment on the reasonableness of the suppositions used in this analysis.