Reference no: EM131825622

A Discounted Cash Flow Valuation: General Mills, Inc.

At the beginning of its fiscal year 2006, an analyst made the following forecast for General Mills, Inc., the consumer foods company, for 2006-2009 (in millions of dollars):

                                                        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 of 9 percent to calculate both the enterprise value and equity value for General Mills at the beginning of 2006 under
two forecasts for long-run cash flows:

a. Free cash flow will remain at 2009 levels after 2009.

b. 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.

a. 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:

Free Cash Flow for Kimberly-Clark Corporation
Below are summary numbers from reformulated balance sheets for 2007 and 2006 for Kimberly-Clark Corporation, the paper product s company, along with numbers from the reformulated 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

a. 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.

b. The firm reported cash flow from operation s of $2,429 million in its 2007 cash flow statement and also reported net interest payments of $142.4 million. It reported $898 million in cash spent on investing activities, but this was after including a net $56 million from liquidating short-term interest-bearing securities. The firm's statutory tax rate is 36.6 percent. Calculate free cash flow from these reported numbers.

Requirement:
Two calculation questions, one is from Chapter 4, the other is from chapter 11.
Font size is 12, 1.5-line space.
Harvard reference system