Aqua Packaging Corp. makes industrial packaging equipment used primarily by automobile manufacturers to produce protective covering for new luxury automobiles being shipped to dealers across the US by train and by truck. It also makes industrial packaging equipment for other consumer goods companies. Below you will find balance sheets for Aqua as of December 31, 2014 and December 31, 2013 and an income statement for the fiscal year ending December 31, 2014 (“fiscal 2014.”) Both statements have been prepared according to GAAP; amounts shown are in millions of US dollars.
Balance Sheet (for year ending December 31, 2014)

Cash                                                    10.3          Trade payables                      91.7
Marketable securities                         94.6       Taxes payable                      14.5
Accounts receivable                            85.7       Current portion, LT debt       35.0
Inventory                                              112.3
Current assets                                  302.9          Current liabilities                141.2
Net property, plant and equipment       621.4                   Long-term debt          325.0
Investments in subsidiaries                81.3                      Deferred tax payable 71.2
Patents, other intangibles                   14.2          Shareholders’ equity             482.4
Total assets                                     1,019.8    Total liabilities and Sh. Equity 1,019.8

Balance Sheet (for year ending December 31, 2013)
Cash                                                    14.7          Trade payables                      81.4
Marketable securities                            112.6       Taxes payable                      1.3
Accounts receivable                            78.6          Current portion, LT debt       10.0
Inventory                                              114.9
Current assets                                  320.8          Current liabilities                92.7
Net property, plant and equipment       620.0                   Long-term debt          360.0
Investments in subsidiaries                   81.3                      Deferred tax payable 71.2
Patents, other intangibles                      14.2       Shareholders’ equity             512.4
Total assets                                     1,036.3    Total liabilities and Sh. Equity 1,036.3

Income Statement
Revenues                            924.2
Cost of goods sold                691.5
Other operating expenses    171.4
EBIT                                     61.3
Interest income                      3.6
Interest expense                   19.5
EBT                                     45.4
Income taxes                      14.1
Net income                            31.3

Other data:
Depreciation expense included in 2014 income was $6.7 million. Capital expenditures in fiscal 2014 were $8.1 million, and Aqua paid dividends of $61.3 million in that year.
Aqua’s debt consists of 2 bond issues: $75 million with a coupon of 7% (maturing in 2025) and $250 million with a coupon of 5% (maturing in 2030.). Aqua would pay a coupon of 8.5% on a bond issue today.
For forecasting, assume Aqua pays a tax rate of 34% on EBIT.
In today’s market, investors can earn a 4% rate of return on a short-term US Treasury note and 6% on a long-term US Treasury bond. Last year, the S&P 500 earned a rate of return of 14.5%.
Aqua’s stock is deemed to have a BETA of 1.1, and you would require a 7% risk premium for an investment in the market portfolio.
The macroeconomic outlook for the packaging equipment industry: the industry grows revenues in line with US GDP, which is expected to grow (on average) 3.5% over the next 7 years. You believe there is a 100% probability of a recession during that period; industry revenues typically drop 10% in a recessionary year.
Cost structure of Aqua: COGS in fiscal 2014 was 46% fixed and 54% variable. Other operating expenses were 34% fixed and 66% variable. For your forecast, assume that fixed costs remain constant for the entire forecast period. Also assume that variable costs remain at the same ratio to revenues as in fiscal 2014. Capital expenditures are forecast at $7.5 million for fiscal 2015, growing at 3% per annum thereafter.

YOUR ASSIGNMENT:
1. Produce a cash flow statement for Aqua for the fiscal year 2014.
2. Determine Free Cash Flow (FCF) for Aqua in fiscal 2014.
3. Produce a 7-year forecast of revenue for Aqua, beginning with fiscal year 2015 (which began January 1, 2015). Explain the details of your forecast.
4. Produce a 7-year forecast of COGS and other operating expenses.
5. Assume that the forecasts in #3 and #4 above are CASH revenues and expenses; produce a 7-year forecast of Free Cash Flow for Aqua.
6. Determine an appropriate horizon (terminal) value for Aqua’s FCF; use a constant growth rate of 2%.
7. What is your estimate of Enterprise Value for Aqua as of January 1, 2015?
8. What is your estimate of the value of Aqua’s equity capital as of the same date?
9. Identify THREE key drivers of Enterprise Value for Aqua; explain why these three are critical to determination of Aqua’s Enterprise Value.
10. Prepare sensitivity analysis on each of the 3 key drivers that you chose in #9.

Aqua Packaging Corp. makes industrial packaging equipment used prim...