Study Of Accounting

Questions1. Use Excel to construct six-year pro forma income statements and calculate the incremental unlevered net income for the first six years.• When calculating incremental unlevered net income, should we include all the expenses mentioned in the case? If not, what expenses should we exclude and why? Clearly and concisely state your reasons in the cell E9 of the excel template. If you just forecast the unlevered net income but don’t given any explanations on why you exclude certain expenses, a penalty of 30 points will deducted from your grade for the case study.2. Calculate six-year projections for free cash flows. Remember to include cash flows from the income statement and depreciation, changes in net working capital, and capital expenditures or dispositions.Hint: You need to calculate the level of net working capital (NWC) and change in NWC. Pay attention to the timing of NWC.3. Canyon Buff expects that free cash flow from Year 6 onwards will increase at a constant rate of 2%/year into the indefinite future. Calculate PV(terminal value that captures the value of future free cash flows in Year 6 and beyond). That is, calculate the terminal value first, then find its value in Year 0 (today).3Hint: We went over this in Lecture Note 6, so let me briefly review the key points: a. Assuming the cash flows grow at a constant rate g after Year N+1, then Year N TV = (Year N+1 CF)/(r−g) (from growing perpetuity formula). where r is discount rate For example, if {FCF6, FCF7, FCF8, …} is a growing perpetuity, then Year 5 TV = Year 6 FCF/(r-g). Similarly, if {FCF7, FCF8, FCF9, …} is a growing perpetuity, then Year 6 TV = Year 7 FCF/(r-g).b. We should discount this Terminal Value back to Year 0.4. Determine the NPV of the project. Remember to net out any initial cash outflows.5. Perform a sensitivity analysis by varying the four parameters as follows:Parameter Initial Assumption Worst Case Best Case Sales in Year 1 $30,000 $27,000 $33,000 NPV Sales Growth through Year 6 6% 0% 10% NPV Cost of Goods Sold (% of Sales) 72% 77% 67% NPV Cost of Capital 20% 23% 17% NPVFor example, vary the parameter “Sales in Year 1” from the worst case $27,000 to the best case $33,000, holding all the other parameters fixed (at the level of initial assumptions). Then fill in the highlighted blank boxes for NPV in Excel (the sheet “Sensitivity Analysis”)Do the same thing for the other three parameters.Suppose you are the financial manager, if you are asked to use limited resources to refine the assumption on ONLY ONE of the above four parameters, which one should you choose and why? Clearly state the reason. Write your answer in Excel.6. Perform a scenario analysis by simultaneously varying the two parameters below:4Sales Growth through Year 6% Cost of Goods Sold NPV Scenario 1 (Baseline) 5% 71% Scenario 2 6% 72% Scenario 3 8% 73% Scenario 4 9% 74%Which scenario generates the highest NPV? Write your answer in Excel.