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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:

  1. Free cash flow will remain at 2009 levels after 2009.
  2. 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. 

  1. 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
  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.
  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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