Teton Valley Case

1
Teton Valley Case

• Free Cash Flows

2
Free Cash Flow

• For each future year you want to calculate
• FCF EBIT(1 Tc) (no debt tax shields
  calculated)
• Depr Amort. (adjust for non-cash
• expenses)
• - Capital Expenditures (a cash flow not
• 
  part of EBIT)
• - Changes in NWC (almost, to adjust
  for accruals.)

3
Teton Valley Corporation

• Sales growth at 10 for 5 years then 4 in
  perpetuity.
• CGS at 65 of sales.
• SGA at 500,000 4.5 of sales.
• Net Fixed assets grow at 5 per year for next 5
  years.
• Depreciation is 20 of beginning of year net
  fixed assets.
• NWC is 80,000, grows with sales.
• FCFs grow at 4 in perpetuity after 2011.

4
Forecasting Earnings
5
The Pro Forma Exercise

• For a complete pro forma analysis we also need to
  forecast the balance sheet.
• Two issues for this example
• The balance sheet is so simple it is a trivial
  exercise.
• We need to make some assumptions. About what?

6
Forecasting the Balance Sheet

• What did I assume?
• Are there any issues?
• Complete the forecast on the spreadsheet.

7
From Earnings To Free Cash Flow
FCF EBIT(1-Tc) Depr. - ?NWC Cap
Ex. So 2007 2007 2008 2008
2007 2008 2009 2010 2011 FCF
791,175 912,418 1,046,141 1,193,610
1,356,219
8
Free Cash Flow

• We start with earnings before interest and taxes.
  Why?
• Before interest because financing costs should
  not be taken out and we are supposing its an all
  equity firm.
• Before taxes to make it easier to ignore the debt
  tax shields that will be included if you use
  actual taxes paid or provision for income taxes.

9
Why is it almost -?NWC?

• Recall there are two reasons
• 1st one of the NWC accounts is the current
  portion of long term debt. We leave out changes
  in the current portion of long term debt from
  cash flow since this is a financing cash flow.
• 2nd a level of the cash account is necessary
  only up to a balance required for liquidity.
  Increases in the cash account above this minimum
  could be paid out as dividends or used to pay
  down principal without reducing the effectiveness
  of the firm going forward. Thus increases in
  cash above the minimum are not to be subtracted
  to find FCF so should not be counted in the
  change to NWC.