Assumption 1 - Sales Growth Rate for the four years is given as:
Year
2007
2008
2009
2010
Sales
Growth
25%
Rate
20%
15%
10%
Assumption 2 – Calculate the depreciation rate for Years 2005 and 2006.
The average depreciation rate will be used as a depreciation rate for the other years.
Depreciation Rate = Depreciation Expense / Net Tangible and Intangible Fixed Assets
Assumption 3 - The interest rate on debt for years 2007 and 2008 is the average interest rate in
years 2005 and 2006. Then, the interest rate will be 10% for 2009 and 8% for the rest.
Interest Rate = Financial Expenses/(Short-term Debt + Long-term Debt)
Assumption 4 – Operating expenses will change at the same rate as sales. Because of investment
in fixed assets, the cost of goods sold will increase only by 75 percent of the increase in sales,
i.e., it will increase by 18.75%, 15%, 11.25% and 7.5% in years 2007, 2008, 2009 and 2010
respectively. Gains and losses from other activities will increase by 20% every year. “Net
Monetary Position Gain/Loss” will be 0.
Assumption 5 – Income tax rate is 30%, if company has a loss, no tax is paid.
Assumption 6 – Assets will increase at the same rate as sales.
Assumption 7 - Accounts Payable, Notes Payable, and Other Short/Long-Term Payable will
change at the same rate as sales.
Assumption 8 - New financing is obtained in order to keep the capital structure the same. It
means that debt ratio will not change.
Total Capital Needed = Total Assets - (Accounts Payable + Notes Payable)
For example, suppose that the company needs to raise capital by 1,000,000 YTL and it finances
25 percent of its assets with short-term debt (excluding Accounts Payable) and 30 percent of its
assets with long-term debt (excluding Notes Payable) and the rest with equity. Then, short-term
debt will increase by 250,000 YTL, long-term debt will increase by 300,000 YTL and equity will
increase by 450,000 YTL
Assumption 9 – One of the Shareholders' Equity accounts, "Capital Reserves", does not change
over time.
Assumption 10 – Profit Appropriation: If the company makes profit, it distributes 25 percent of
current year’s earnings as dividends. No dividends will be distributed if the company makes a
loss. Below is the process of profit Appropriation:
At the end of a year the balance sheet will show that year’s profit or loss in either “Net profit for
the year” or “Net profit for the year” accounts. At the beginning of the next year this amount is
transferred to “Past Profits/Losses” account. If the transferred amount is positive, i.e. the
company made profits over the past year, then: 25% of the transferred amount (profits) are paid
as dividends, 20% of the transferred amount (profits) are transferred to profit reserves, and 30%
of the transferred amount (profits) are transferred to retained earnings. That means, the remaining
amount after making these transfers (25%) equals the change in the “Past Profits/Losses”
account. However, if the transferred amount is negative then the whole amount equals the change
in the “Past Profits/Losses” account.
Assumption 11 – Find the stock price by using the present value of free cash flows over the next
30 years, i.e. consider free cash flows over the period 2007-2037. Assume that free cash flows
will not change after 2010, in other words, FCF2010=FCF2011= …..=FCF2037.