Leave the capital requirement ratios at 60% for all three years and thereafter, but increase the sales growth rates for Years 2, 3, and thereafter to 7%. What is the new value of operations? Did it go up or down relative to the other scenarios? Why did it change in this manner?
Start with the partial model in Ch07 P26 Build a Model.xlsx on the textbook’s Web site.
Traver-Dunlap Corporation has a 15% weighted average cost of capital (WACC). Its most
recent sales were $980 million, and its total net operating capital is $970 million. The
following table shows estimates of the
expected to remain constant after the third year. Use this information to answer the following questions:
Estimated Base Case Data for Traver-Dunlap Corporation
Forecast Year
1 2 3
Annual sales growth rate 20% 6% 6%
Operating profitability (NOPAT/Sales) 12% 10% 10%
Capital requirement (OpCap/Sales) 80% 80% 80%
Tax rate 35% 35% 35%
Return the growth rates to the original values. Now suppose that the capital requirement ratio can be decreased to 60% for all three years and thereafter. What is the
new value of operations? Did it go up or down relative to the original base case?
Why did it change in this manner?
e. Leave the capital requirement ratios at 60% for all three years and thereafter, but
increase the sales growth rates for Years 2, 3, and thereafter to 7%. What is the new
value of operations? Did it go up or down relative to the other scenarios? Why did it
change in this manner?
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