Baldwin Case Study Essay

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
incremental) cost of debt and equity 249.72 212.30 129.90 finance. 0.00 100.00 163.20 8´ 9+10 Therefore, cash flows to investors (e.g. interest and dividend 10% $10.00 $11.00 $12.10 $13.31 $14.64 payments) should not also be 8´ 12 reflected in50.00 operating cash 87.84 the 88.00 145.20 133.10 0.00 0.00 0.00 0.00 0.00 20.00 Similarly, the 11.52 flows; this would amount to double counting. 32.00 19.20 11.52 tax 30.00 43.20 deductibility of interest expenses is reflected in the 85.32 67.68and WACC 30.54 0.00 0.00 0.00 0.00 0.00 therefore excluded from operating cash flows.43.20 85.32 67.68 30.54 30.00 16 + 17 n/a 30.00 10.20 19.80 n/a 43.20 14.69 n/a 28.51 n/a n/a
incremental) cost of debt and equity finance. Therefore, cash flows to investors (e.g. interest and dividend payments) should not also be reflected in the operating cash 16 + 17 flows; this would amount to double counting. Similarly, the tax deductibility of interest expenses is reflected in the WACC and 34% therefore excluded from operating cash flows. 19 - 20

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