Use the Table for the Question(s)below

question 15

Multiple Choice

Use the table for the question(s) below. FCF Forecast ($ million)
Year 0 1 2 3 4
Sales 240 270 290 310 325.5
Growth versus Prior Year 12.5% 7.4% 6.9% 5.0%
EBIT (10% of Sales) 27.00 29.00 31.00 32.55
Less: Income Tax (37%) (9.99) (10.73) (11.47) (12.44)
Less Increase in NWC (12% of Change in Sales 3.6 2.4 2.4 1.86
Free Cash Flow 13.41 15.87 17.13 18.65
Banco Industries expect sales to grow at a rapid rate over the next 3 years, but settle to an industry growth rate of 5% in year 4. The spreadsheet above shows a simplified pro forma for Banco Industries. Banco industries has a weighted average cost of capital of 11%, $40 million in cash, $70 million in debt, and 18 million shares outstanding. If Banco Industries can reduce its operating expenses so that EBIT becomes 12% of sales, by how much will its stock price increase?

• A)$3.27
• B)$3.92
• C)$5.72
• D)$9.80

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Definitions:

Productivity

A measure of the efficiency of production, expressed as the ratio of output to inputs used in the production process.

Absence

The state of being away from a place or the lack of something that is expected to be present.

Net Present Value

The calculation used to determine the present value of all cash flows associated with a project or investment, including initial capital outlay and all subsequent flows, discounted at a particular rate.

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