Voluntary, 5% of the final grade

Background You have been given the Balance Sheet and Income Statement for Winnebago as of August 25, 2006. The value of the stock of a company can be determined by calculating the present value of the cashflows generated by the company and available to stock holders. Winnebago has historically repurchased large amounts of stock with their excess cash flow. These stock repurchases have the same impact as dividends so we will assume that Winnebago will pay out all available cash flows above some minimum level required for Net Working Capital in dividends in the future. As we have shown earlier in the semester if Winnebago reinvests these cash flows in projects that earn the return the market requires for Winnebago, the value of the stock will not change, so this assumption is appropriate.

The spreadsheet “projection template WGO” contains a summarized income statement and a projection for 2007. You should use this as the start of a valuation template you will need to create to calculate the cashflow projections needed to value the common stock of Winnebago Corporation as of 8/25/2006. Use this spreadsheet to answer the following questions. Print your valuation spreadsheet and comment on the whether or not you agree with the financial assumptions you were given for this valuation. Your spreadsheet and comments will be due before the final exam on May 3.

1. Use the excel spreadsheet to project the net income for Winnebago from assumptions about key revenue and expense items. Use the following assumptions to calculate the projected net income, operating cash flow and investment cash flow for Winnebago for 2007 through 2011.

Sales Growth through 2011 14.0%
Sales Growth after 2011 7.0% forever
Variable Costs as a % of Sales 84.0%
Fixed Costs as a % of Sales 4.0%
Depreciation Expense and Investment in Property Plant and Equipment will grow at the same rate as Sales.
Because we assume they pay out all excess cash Financial Income will be zero in the future.
Tax Rate 35.0%

2. Calculate the Operating Cashflows from 2007 – 2011 using the indirect method to add back depreciation. Assume that depreciation will grow at the same rate as sales.

3. Assume you can reduce the cash on hand and the company will need to hold Net Working Capital (including cash) equal to 4% of the next year’s sales going forward. This will result in a very large reduction in NWC in 2007. You will also need to project 2012 Sales to calculate the NWC in 2011.

4. Calculate the Total Cashflows from 2007 – 2011. Assume that the company will need to increase their annual investment in fixed assets (representing new equipment) at the same rate as sales.

5. Calculate the price of Winnebago stock (Winnebago has no debt so this is the market value of the firm divided by the number of common shares outstanding.) from the cashflows you calculated above. Assume Winnebago has a Beta of 2.01 the Market Return is expected to be 10.5% and the Risk Free rate is 3.5%. Assume there are 31,143,000 shares outstanding.

6. Go to the internet (Try Smartmoney.com) and compare your price to the market price of Winnebago stock on August 25, 2006. If your price per share is not close to this value, check your projection.

7. Comment on the reasonableness of the assumptions used in this analysis.