Financial accounting

A client explains that her firm’s value must be affected by the choice of explicit forecast horizon. Build a model to test her claim. NOPLAT, depreciation, and gross investment for year 1 have been forecasted to be $10.0, $2.5, and $13.61, respectively.

a. To evaluate your client’s claim, first assume a short horizon of three years.

Don't use plagiarized sources. Get Your Custom Essay on
Financial accounting
Just from $13/Page
Order Essay

b. Compare the results of this three-year horizon to a five-year forecasted horizon. The company’s management team forecasted ROIC for years 1-3 to be 18 percent and 11 percent after that period. The company executives also forecasted NOPLAT to grow at 20 percent for years 1-3 and a decline to continuing growth rate of 7 percent thereafter. Depreciation in year t = 25% of NOPLAT in year t. Finally, the management team has estimated an initial WACC of 14 percent for years 1-3, and declining to 12 percent after the initial forecasted period.

c. Compare your computed value for both time horizons. Provide an explanation of your results. (Hint: Firm value using the 3-year horizon should equal the firm value using the 5-year horizon.)

· Gross investment for any year is NOPLAT × (g/ROIC) + Depreciation.

· The CV is the present value of the first year’s CV base free cash flow, NOPLAT× (1 – g/ROIC),discounted as a growing perpetuity: NOPLAT × (1 – g/ROIC)/(WACC – g) for years 4+ (or years 6+ for the five-year horizon). Remember to discount CV back to time zero to find the present value.

· FCF = NOPLAT + Depreciation – Gross Investment.

Place Order
Grab A 14% Discount on This Paper
Pages (550 words)
Approximate price: -
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Try it now!

Grab A 14% Discount on This Paper

Total price:
$0.00

How it works?

Follow these simple steps to get your paper done

Place your order

Fill in the order form and provide all details of your assignment.

Proceed with the payment

Choose the payment system that suits you most.

Receive the final file

Once your paper is ready, we will email it to you.