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Chapter 4: A Discounted Cash Flow Valuation: General Mills, Inc. (10 marks)
At the beginning of its fiscal year 2006, an analyst made the following forecastfor GeneralMills, Inc., the consumer foods company, for 2006-2009 (in millions ofdollars):
2005 2006 2007 2008 2009
Cash flow from operations 2,014 2,057 2,095 2,107
Cash investment in operations 300 380 442 470
General Mills reported $6, 192 million in short-term and long-term debt at the end of 2005 but very little in interest-bearing debt assets. Use a required return of9 percent to calculate both the enterprise value and equity value for General Mills at the beginning of2006 under two forecasts for long-run cash flows:
- Free cash flow will remain at 2009 levels after 2009.
- Free cash flow will grow at 3 percent per year after 2009.
General Mills had 369 million shares outstanding at the end of 2005, trading at $47 per share. Calculate value per share and a value-to-price ratio under both scenarios.
- The exercise involves calculating free cash flows, discounting them to present value, then adding the present value of a continuing value. For part (a) of the question, the continuing value has no growth:
Chapter 11: Free Cash Flow for Kimberly-Clark Corporation (10 marks)
Below are summary numbers from reformulated balance sheets for 2007 and 2006 forKimberly-Clark Corporation, the paper product s company, along with numbers from thereformulated income statement for 2007 (in millions of dollars).
| 2007 | 2006 | |
| Operating assets | $18, 057.0 | $16,796.2 |
| Operating liabilities | 6 , 011.8 | 5,927.2 |
| Financial assets | 382.7 | 270.8 |
| Financial obligations | 6,496.4 | 4,395.4 |
| Operating income (after tax) | $2,740.1 | |
| Net financial expense (after tax) | 147.1 |
- The net payout to shareholders (dividends and share repurchases minus share issues)in 2007 was $3,405.9 million. Calculate free cash flow using Method 1 and Method 2.
- The firm reported cash flow from operation s of $2,429 million in its 2007 cash flowstatement and also reported net interest payments of $142.4 million. It reported $898million in cash spent on investing activities, but this was after including a net $56 millionfrom liquidating short-term interest-bearing securities. The firm’s statutory taxrate is 36.6 percent. Calculate free cash flow from these reported numbers.
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