Baldwin Case

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Investment Policy
Baldwin Case: Solution

Baldwin: Operating Cash Flow
Income 8 Production units (# bowling balls) 9 Unit price (reflecting a 2% growth rate) 10 Erosion or synergy with existing line 11 Total operating revenues 12 Unit cost (reflecting a 10% growth rate) 13 Cost of goods sold 14 Selling, general, & administrative expenses 15 Fiscal depreciation (from capital spending) 16 Operating income (11 - 13 - 14 - 15) 17 Other income 18 Earnings before interest & taxes (EBIT) Interest expense 19 Pretax income 20 Current taxes Deferred taxes Net income Addition to retained earnings Dividends 21 Operating Cash Flow (OCF) 22 Total Project Cash Flow (FCF) Year: 2% 8×9+10

0

10%
8×12

16 + 17

1 5,000 $20.00 0.00 100.00 $10.00 50.00 0.00 20.00 30.00 0.00 30.00 30.00 10.20 19.80

2

3

4

5

34%
19 - 20

18+15-20 7 + 21

-260

39.80 39.80

Baldwin: Operating Cash Flow
8 9 10 11 12 13 14 15 16 17 18 19 20 Income Production units (# bowling balls) Unit price (reflecting a 2% growth rate) Erosion or synergy with existing line Total operating revenues Unit cost (reflecting a 10% growth rate) Cost of goods sold Selling, general, & administrative expenses Fiscal depreciation (from capital spending) Operating income (11 - 13 - 14 - 15) Other income Earnings before interest & taxes (EBIT) Interest expense Pretax income Current taxes Deferred taxes Net income Addition to retained earnings Dividends Operating Cash Flow (OCF) Total Project Cash Flow (FCF) Year: 2% 8×9+10

0

10%
8×12

16 + 17

34%
19 - 20

21 22

18+15-20 -260 7 + 21

1 2 3 4 5,000 8,000 12,000 10,000 $20.00 $20.40 $20.81 $21.23 0.00 0.00 0.00 0.00 100.00 163.20 249.72 212.30 $10.00 $11.00 $12.10 $13.31 50.00 88.00 145.20 133.10 0.00 0.00 0.00 0.00 20.00 32.00 19.20 11.52 30.00 43.20 85.32 67.68 0.00 0.00 0.00 0.00 30.00 43.20 85.32 67.68 n/a n/a n/a 30.00 43.20 85.32 67.68 10.20 14.69 29.01 23.01 n/a n/a n/a 19.80 28.51 56.31 44.67 n/a n/a n/a n/a n/a n/a 39.80 60.51 75.51 56.19 39.80 54.19 66.86 59.94

5 6,000 $21.65 0.00 129.90 $14.64 87.84 0.00 11.52 30.54 0.00 30.54 n/a 30.54 10.38 n/a 20.16 n/a n/a 31.68 224.65 3

Baldwin: Operating Cash Flow
8 9 10 11 12 13 14 15 16 17 18 19 20 Income Production units (# bowling balls) Unit price (reflecting a 2% growth rate) Erosion or synergy with existing line Total operating revenues Unit cost (reflecting a 10% growth rate) Cost of goods sold Selling, general, & administrative expenses Fiscal depreciation (from capital spending) Operating income (11 - 13 - 14 - 15) Other income Earnings before interest & taxes (EBIT) Interest expense Pretax income Current taxes Deferred taxes Net income Addition to retained earnings Dividends Operating Cash Flow (OCF) Total Project Cash Flow (FCF) Year: 2% 8×9+10

0

These projections on units sold, price, unit cost, and the erosion 8´ 12 or synergy with existing product lines, are the key piece of intelligence from the test marketing study. In hind sight, Baldwin should have thought harder about what set of projec16 + 17 tions could have justified spending $250,000 on such a study in the first place. In other words, at the time it ordered the study, 34% Balwin should have asked itself whether the new product line 19 - exceeding $250,000: It could could conceivably have a value 20 have done the pro formas and reality-checked the assumptions. 18+15-20 -260 7 + 21

10%

21 22

1 2 3 4 5,000 8,000 12,000 10,000 $20.00 $20.40 $20.81 $21.23 0.00 0.00 0.00 0.00 100.00 163.20 249.72 212.30 $10.00 $11.00 $12.10 $13.31 50.00 88.00 145.20 133.10 0.00 0.00 0.00 0.00 20.00 32.00 19.20 11.52 30.00 43.20 85.32 67.68 0.00 0.00 0.00 0.00 30.00 43.20 85.32 67.68 n/a n/a n/a 30.00 43.20 85.32 67.68 10.20 14.69 29.01 23.01 n/a n/a n/a 19.80 28.51 56.31 44.67 n/a n/a n/a n/a n/a n/a 39.80 60.51 75.51 56.19 39.80 54.19 66.86 59.94

5 6,000 $21.65 0.00 129.90 $14.64 87.84 0.00 11.52 30.54 0.00 30.54 n/a 30.54 10.38 n/a 20.16 n/a n/a 31.68...
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