Corporate Finance - Clarkson Lumber Co Assignment Questions

Instructions:

Your group should upload one electronic copy of your Excel solution on Canvas. You should
submit a solution to all “Assignment Questions”. “Discussion Questions” are designed to provoke thought and will be discussed in class but you do not need to addressthese in your assignment. Yoursolution should be formatted and set outso that it is easy to read, clearly show your working, the logic behind your answers, and any assumptions you made in the analysis. This assignment usesthe same case text you read for lecture 8 (Clarkson 1).
Keith Clarkson, sole owner and president of the Clarkson Lumber Company, has received a number of informal inquiries from large, nationally-recognized building materials distributors about purchasing his company. Although, Clarkson relishes operating his own business he would be interested if an attractive offer were received. Unfortunately, Mr. Clarkson is unsure how much his company is worth so he turns to you for guidance.
Value Clarkson Lumber at December 31, 19951 assuming the firm will obtain a credit line at
Northwestern National Bank sufficiently large to take advantage of discounts on purchases for paying within 10 days of invoice, thus increasing operating profit margins. With higher mark-ups and continued operating expense controls, Clarkson projects a steady operating profit margin of 6% by 2000 after which he expects the sales growth rate to drop to a fairly steady 5% per year. Margins and investment requirements will also stabilize in relation to sales growth. Relevant projection inputs are in the table below. The discount rate is 11.5%. Note that the forecast ratios already include the benefit of the 2% trade discounts. For simplicity, use a tax rate of 35% throughout the projections, i.e., disregard the tax schedule in note (c) to Exhibit 1. All notes payable on Clarkson’s balance sheet are interest-bearing liabilities. Make whatever other reasonable assumptions are necessary to complete your analysis and explain the rationale for each.

Assignment Questions

1. Project free cash flows for the next five years, 1996-2000. Estimate the residual value at the end of year 5 using both the perpetuity with growth and competitive markets (PVGO = 0) assumptions. For the perpetuity with growth formula, you need to figure out the year T when FCF growth stabilizes.2 Use the same year T to compute the residual value using the competitive markets approach.