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Forecast Ideko's free cash flow (reproduce Table 19.10 ]), assuming Ideko's market share will increase by 0.50 percent per year; investment, financing, and depreciation will be adjusted accordingly; and the projected improvements in working capital occur (that is, Ideko's working capital requirements through 2010 will be as shown here ). Ideko's pro-forma income statements for 2005-2010 are shown here , while its balance sheet for 2005 is shown here . Ideko's production plant will require an expansion in 2010 (when production volume will exceed the current level by 50%), and the cost of this expansion will be $15.0 million. This amount will be borrowed from a financial institution at an interest rate of 6.8%. The new projected capital investments are shown here : - (Assume an income tax rate of 35%.) Calculate Ideko's free cash flow through 2010 below: (Round to the nearest $ 000.) Free Cash Flow ($ 000) 2006 2007 2008 2009 2010 Net Income Plus: After-tax Interest Expense Unlevered Net Income Plus: Depreciation Less: Increase in NWC Less: Capital Expenditures Free Cash Flow of Firm Plus: Net Borrowing Less: After-tax Interest Expense Free Cash Flow to Equity TABLE 19.10 SPREADSHEET Ideko's Free Cash Flow Forecast Year 2005 2006 2007 2008 2009 2010 Free Cash Flow ($ 000) 1 Net Income 5,193 6,247 6,960 8,382 10,545 2 Plus: After-Tax Interest Expense 4,420 4,420 4,420 5,083 5,304 3 Unlevered Net Income 9,613 10,667 11,380 13,465 15,849 4 Plus: Depreciation 5,450 5,405 6,865 7,678 7,710 5 Less: Increases in NWC 3,412 (3,663) (4,089) (4,685) (5,231) 6 Less: Capital Expenditures (5,000) (5,000) (20,000) (15,000) (8,000) 7 Free Cash Flow of Firm 13,475 7,409 15,845) 1,458 10,328 8 Plus: Net Borrowing 15,000 5,000 9 Less: After-Tax Interest Expense (4,420) (4,420) (4,420) (5,083) (5,304) 10 Free Cash Flow to Equity 9,055 2.989 4,735 1,375 5,024 Ideko's Working Capital Requirements Working Capital Days Assets Based on: Accounts Receivable Sales Revenue Raw Materials Raw Materials Costs Finished Goods Raw Materials + Labor Costs Minimum Cash Balance Sales Revenue Liabilities Wages Payable Direct Labor + Admin Costs Other Accounts Payable Raw Materials + Sales and Marketing 2005 Days 90 45 45 30 > 2005 Days 60 30 45 30 15 45 15 45 Working Capital ($ 000) 2005 2006 2007 2008 2009 2010 Assets Accounts Receivable 18,493 13,864 15,556 17,418 19,465 21,716 Raw Materials 1,973 1,464 1,627 1,804 1,996 2,205 Finished Goods 4,192 4,741 5,352 6,029 6,781 7,615 Minimum Cash Balance 6,164 6,932 7,778 8,709 9,733 10,858 Total Current Assets 30,822 27,001 30,313 33,960 37,975 42,394 Labilities Wages Payable 1,295 1,368 1,554 1,717 1,895 2,142 Other Accounts Payable 3,360 3,912 4,541 5,253 5,914 6,565 Total Current Liabilities 4,655 5,280 6,095 6,970 7,809 8,707 Net Working Capital 26,167 21,721 24,218 26,990 30,166 33,687 Increase in Net Working Capital (4,446) 2,497 2,772 3,176 3,521 Income Statement ($ 000) 2005 2006 2007 2008 2009 2010 Sales 75,000 84,341 94,631 105,957 118,414 132,106 Cost of Goods Sold Raw Materials (24,285) (16,000) (18,000) (17,816) (20,639) (19,795) (23,612) (21,946) (26,956) (26,829) (34,939) Direct Labor Costs (30,714) Gross Profit 45,886 51,224 57,055 63,415 Sales and Marketing 41,000 (11,250) (13,500) (13,916) (12,651) (17,034) (14,195) (20,662) (14,834) (23,683) (15,394) 70,338 (26,421) (17,174) Administrative EBITDA 16,250 19,319 19,995 21,559 24,338 26,743 Depreciation (5,500) (5,450) (5,405) (5,365) (5,328) (6,795) EBIT 10,750 13,869 14,590 16,194 19,010 19,948 Interest Expense (net) (6,800) (6,800) (6,800) (6,800) (6,800) (75) 10,675 Pretax Income 9,394 12,210 13,148 7,069 (2,474) 7,790 (2,727) Income Tax (3,736) (3,288) (4,274) (4,602) Net Income 6,939 4,595 5,063 6,106 7,936 8,546 Estimated 2005 Balance Sheet Data for Ideko Corporation Balance Sheet ($ 000) Assets Cash and Equivalents Accounts Receivable Inventories Total Current Assets Property, Plant, and Equipment Goodwill Total Assets 6,164 18,493 6,165 30,822 49,500 72,332 152,654 Liabilities and Stockholders' Equity Accounts Payable Debt Total Liabilities Stockholders' Equity Total Liabilities and Equity 4,654 100,000 104,654 48,000 152,654 Fixed Assets and Capital Investment ($ 000) 2005 2006 2007 2008 5,000 5,000 5,000 5,000 (5,500) (5,450) (5,405) (5,365) New Investment Depreciation 2009 5,000 (5,328) 2010 20,000 (6,795) Forecast Ideko's free cash flow (reproduce Table 19.10 ]), assuming Ideko's market share will increase by 0.50 percent per year; investment, financing, and depreciation will be adjusted accordingly; and the projected improvements in working capital occur (that is, Ideko's working capital requirements through 2010 will be as shown here ). Ideko's pro-forma income statements for 2005-2010 are shown here , while its balance sheet for 2005 is shown here . Ideko's production plant will require an expansion in 2010 (when production volume will exceed the current level by 50%), and the cost of this expansion will be $15.0 million. This amount will be borrowed from a financial institution at an interest rate of 6.8%. The new projected capital investments are shown here : - (Assume an income tax rate of 35%.) Calculate Ideko's free cash flow through 2010 below: (Round to the nearest $ 000.) Free Cash Flow ($ 000) 2006 2007 2008 2009 2010 Net Income Plus: After-tax Interest Expense Unlevered Net Income Plus: Depreciation Less: Increase in NWC Less: Capital Expenditures Free Cash Flow of Firm Plus: Net Borrowing Less: After-tax Interest Expense Free Cash Flow to Equity TABLE 19.10 SPREADSHEET Ideko's Free Cash Flow Forecast Year 2005 2006 2007 2008 2009 2010 Free Cash Flow ($ 000) 1 Net Income 5,193 6,247 6,960 8,382 10,545 2 Plus: After-Tax Interest Expense 4,420 4,420 4,420 5,083 5,304 3 Unlevered Net Income 9,613 10,667 11,380 13,465 15,849 4 Plus: Depreciation 5,450 5,405 6,865 7,678 7,710 5 Less: Increases in NWC 3,412 (3,663) (4,089) (4,685) (5,231) 6 Less: Capital Expenditures (5,000) (5,000) (20,000) (15,000) (8,000) 7 Free Cash Flow of Firm 13,475 7,409 15,845) 1,458 10,328 8 Plus: Net Borrowing 15,000 5,000 9 Less: After-Tax Interest Expense (4,420) (4,420) (4,420) (5,083) (5,304) 10 Free Cash Flow to Equity 9,055 2.989 4,735 1,375 5,024 Ideko's Working Capital Requirements Working Capital Days Assets Based on: Accounts Receivable Sales Revenue Raw Materials Raw Materials Costs Finished Goods Raw Materials + Labor Costs Minimum Cash Balance Sales Revenue Liabilities Wages Payable Direct Labor + Admin Costs Other Accounts Payable Raw Materials + Sales and Marketing 2005 Days 90 45 45 30 > 2005 Days 60 30 45 30 15 45 15 45 Working Capital ($ 000) 2005 2006 2007 2008 2009 2010 Assets Accounts Receivable 18,493 13,864 15,556 17,418 19,465 21,716 Raw Materials 1,973 1,464 1,627 1,804 1,996 2,205 Finished Goods 4,192 4,741 5,352 6,029 6,781 7,615 Minimum Cash Balance 6,164 6,932 7,778 8,709 9,733 10,858 Total Current Assets 30,822 27,001 30,313 33,960 37,975 42,394 Labilities Wages Payable 1,295 1,368 1,554 1,717 1,895 2,142 Other Accounts Payable 3,360 3,912 4,541 5,253 5,914 6,565 Total Current Liabilities 4,655 5,280 6,095 6,970 7,809 8,707 Net Working Capital 26,167 21,721 24,218 26,990 30,166 33,687 Increase in Net Working Capital (4,446) 2,497 2,772 3,176 3,521 Income Statement ($ 000) 2005 2006 2007 2008 2009 2010 Sales 75,000 84,341 94,631 105,957 118,414 132,106 Cost of Goods Sold Raw Materials (24,285) (16,000) (18,000) (17,816) (20,639) (19,795) (23,612) (21,946) (26,956) (26,829) (34,939) Direct Labor Costs (30,714) Gross Profit 45,886 51,224 57,055 63,415 Sales and Marketing 41,000 (11,250) (13,500) (13,916) (12,651) (17,034) (14,195) (20,662) (14,834) (23,683) (15,394) 70,338 (26,421) (17,174) Administrative EBITDA 16,250 19,319 19,995 21,559 24,338 26,743 Depreciation (5,500) (5,450) (5,405) (5,365) (5,328) (6,795) EBIT 10,750 13,869 14,590 16,194 19,010 19,948 Interest Expense (net) (6,800) (6,800) (6,800) (6,800) (6,800) (75) 10,675 Pretax Income 9,394 12,210 13,148 7,069 (2,474) 7,790 (2,727) Income Tax (3,736) (3,288) (4,274) (4,602) Net Income 6,939 4,595 5,063 6,106 7,936 8,546 Estimated 2005 Balance Sheet Data for Ideko Corporation Balance Sheet ($ 000) Assets Cash and Equivalents Accounts Receivable Inventories Total Current Assets Property, Plant, and Equipment Goodwill Total Assets 6,164 18,493 6,165 30,822 49,500 72,332 152,654 Liabilities and Stockholders' Equity Accounts Payable Debt Total Liabilities Stockholders' Equity Total Liabilities and Equity 4,654 100,000 104,654 48,000 152,654 Fixed Assets and Capital Investment ($ 000) 2005 2006 2007 2008 5,000 5,000 5,000 5,000 (5,500) (5,450) (5,405) (5,365) New Investment Depreciation 2009 5,000 (5,328) 2010 20,000 (6,795)

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