QUESTION 1:
This question will require that you develop the concept of CFFA (Cash Flows from Assets) for a publically traded corporation. Assume this corporation: (a) plows-back 75% of its net income into the firm for reinvestment, (b) has Gross Income of between $70,000,000 and $100,000,000 million for the last reporting period, and (c) has a marginal tax rate of 30%. First, you are to create the necessary Balance Sheets and Income Statement and then calculate the annual Cash Flow from Assets (aka: CFFA or Free Cash Flows (FCF)). A constraint here, however, is that your CFFA_0 must range between $7,000,000 and $12,000,000 annually. Second, after calculating CFFA_0, you are to estimate the intrinsic value of this corporation. You also know: (a) the corporation is a constant-growth perpetuity and (b) the corporation WACC (market determined risk-adjusted required rate of return.

ANSWER:
Prior to answering the question by addressing the requirements, it is important to employ some analysis to plan the strategic approach to preparing the needed solutions. It is noted that assumptions regarding balance sheet and income statement information are necessary. Specifically, comparative balance sheets for at least two periods and an income statement for one period are necessary. Figures on the financial statements must reconcile with the stipulated gross income and cash flow from assets ranges. Also, assumptions for the constant growth rate and corporate weighted average cost of capital (WACC) are essential, especially in computing for the intrinsic value of the company.
At this point, I would like to assume a modest constant growth rate of 6.0% and a WACC of 10.0%.

PART 1:
Cash flows from assets or CFFA is the sum of cash flow to both providers of debt and equity capital. Cash flow from operating activities, net capital spending, and change in net working capital are the three components of CFFA.
To facilitate the calculation of the current year’s CFFA of NhojjohN Corporation, and publicly listed company engaged in the manufacture and sale of electronic items, the following financial statements are produced:

NhojjohN
Statement of Financial Position
As of Dec. 31, 2016 and 2017
$000,000
2016 2017
Assets Liabilities 2016 2017
Current assets: Current liabilities:
Cash $       67.60 $       25.00 Accounts payable $       20.00 $       25.00
Accounts receivable $       62.60 $       72.60 Notes payable $       37.60 $       40.00
Inventory $       52.60 $       62.60 Total current liabilities $       57.60 $       65.00
Total current assets $       182.80 $       160.20
Long-term liabilities $       172.60 $       178.40
Fixed assets:
Property, Plant, and Equipment, net $       142.60 $       223.00 Stockholders' Equity
Total fixed assets $       142.60 $       223.00 Common stock $       40.00 $       40.00
Retained earnings $       55.00 $       99.80

Total stockholders' equity $       95.00 $       139.80

Total Assets $       325.40 $       383.20 Total Liabilities and Stockholders' Equity $       325.20 $       383.20

NhojjohN
Statement of Financial Performance
For the years ended Dec. 31, 2016 and 2017
$000,000

Net sales $       165.00
Cost of goods sold $       75.00
Depreciation $       20.00
Earnings before interest and tax (EBIT) $       70.00
Interest paid $          6.00
Taxable income $       64.00
Taxes (30%) $       19.20

Net income $       44.80

Dividends (25%) $       11.20

Let us follow the cash flow identity method in computing for the CFFA for 2017. The formula to compute for CFFA under this method is:

CFFA=Cash flow to Creditors+Cash flow to Equity Holders

Based on the above formula, there are two components of CFFA. Let’s compute for the first component, Cash flow to Creditors, which we denote as CFC, as follows:

CFC=Interest paid-Net net borrowings

The CFC amount for 2017 is computed in a straightforward manner. The statement of financial performance for 2017 shows that $6,000,000 of interest expense was incurred. Since there is no amount of interest payable on the 2017 statement of financial position, then, the full $6,000,000 was paid to creditors. As for net new borrowings, we simply compare the long-term liabilities of NhojjohN for the past two years. Note that the account increased from $172.6 to $178.4 million, resulting in net new borrowings of $5,800,000.
Since we have already determined the amount of interest paid as well as net new borrowings, we can now compute for CFC as follows:

CFC=$6,000,000-$5,800,000
CFC=$200,000

Now, let’s proceed to computing for the second component of CFFA based on the cash flow identify, the Cash Flow to Equity Holders, which we denote here as CFE:

CFE=Dividends-New equity raised

Similar to our computation process for CFC, the CFE is arrived at in a straightforward manner. The statement of financial performance shows that dividends totaling to

FFA (Cash Flows from Assets) for a publicly traded corporation....