# Hongxing Auto Sales and Service Co Case Solution

Solution Id Length Case Author Case Publisher
1321 1039 Words (5 Pages) James E. Hatch, Yuan Shi, Wei Sun Ivey Publishing : 909N31
This solution includes: A Word File and An Excel File

There are multiple risks associated with the discounted cash flows which are inherently present in the projection of cash flows. Firstly, the capital expenditures are projected for the calculation of free cash flows. As the number of periods increases, the uncertainty increases and hence the cash flows face large exposure. Secondly, the calculation of the discount rate is also risky in the discounted cash flow analysis. The weighted average cost of capital and the capital asset pricing model both techniques are quite theoretical and may not work in the real world. Another risk associated with the discount rate is the usage of growth in the dividend discount model. The growth rate which is used in dividend discount model is on a perpetual basis. The problem with this is again that anything in perpetual basis is strictly theoretical and may differ in the real practical world. Therefore, the discounted cash flows fluctuate significantly as they are predominantly dependent upon the assumptions which are made to project the cash flows. Therefore, assumptions must be realistic.

## Following questions are answered in this case study solution

1. 5 Years Pro forma Set of Financial Statements

2. Five years Free Cash Flow and DCF Analysis

3. Discuss risk factors and their impact on your valuation.

4. Document and justify your calculation of terminal value.

## Case Analysis for Hongxing Auto Sales and Service Co Case Solution

#### 1. 5 Years Pro forma Set of Financial Statements

 Assumptions Business Tax (5% of Service Revenue) 5% Tax Rate 33% GDP Growth Rate 13.0%
 Performa Income Statement 2005 % of Sales 2006 2007 2008 2009 2010 Y Y Y Y Y Y Sales 12,009,590 13,570,837 15,335,045 17,328,601 19,581,320 22,126,891 Sales Revenue 8,535,166 71% 9,644,738 10,898,553 12,315,365 13,916,363 15,725,490 Service Revenue 3,474,424 29% 3,926,099 4,436,492 5,013,236 5,664,957 6,401,401 Business Tax (5% of Service Revenue) 173,721.20 196,305 221,825 250,662 283,248 320,070 Cost of Goods Sold 9,182,252 76% 10,375,945 11,724,818 13,249,044 14,971,420 16,917,704 Gross Margin 2,653,617 2,998,587 3,388,403 3,828,896 4,326,652 4,889,117 Operating Expenses Salaries, Wages & Benefits 378,000 3% 427,140 482,668 545,415 616,319 696,440 Telephone, Heat, Taxes 49,000 0% 55,370 62,568 70,702 79,893 90,279 Advertisement 70,000 1% 79,100 89,383 101,003 114,133 128,970 Insurance, Legal, Accounting 125,000 1% 141,250 159,613 180,362 203,809 230,304 Repairs, Maintenance, Tools & Supplies 23,000 0% 25,990 29,369 33,187 37,501 42,376 Office Expense & Travel 22,000 0% 24,860 28,092 31,744 35,870 40,534 Truck Operations 73,000 1% 82,490 93,214 105,331 119,025 134,498 Bad Debt 8,000 0% 9,040 10,215 11,543 13,044 14,739 Depreciation 56,000 0% 63,280 71,506 80,802 91,307 103,176 Total Operating Expense 804,416 7% 908,520 1,026,628 1,160,089 1,310,901 1,481,318 Earnings Before Interest & Taxes 1,849,201 2,090,067 2,361,776 2,668,807 3,015,751 3,407,799 Interest 33,480 200,000 200,000 200,000 200,000 200,000 Earnings Before Taxes 1,815,721 1,890,067 2,161,776 2,468,807 2,815,751 3,207,799 Income Taxes 599,188 623,722 713,386 814,706 929,198 1,058,574 Net Income After Interest & Taxes 1,216,533 1,266,345 1,448,390 1,654,100 1,886,553 2,149,225 Retained Earnings Beginning 2,235,349 3,251,882 3,025,882 2,770,502 2,481,922 2,155,828 Dividend 200,000 2% 226,000 255,380 288,579 326,095 368,487 Retained Earnings Closing 3,251,882 3,025,882 2,770,502 2,481,922 2,155,828 1,787,341

 Performa Balance Sheet 2005 % Of Assets 2006 2007 2008 2009 2010 Assets Y Y Y Y Y Y Current Assets Cash & Bank Deposit 1,590,020 29.8% 1,709,272 1,837,467 1,975,277 2,123,423 2,282,679 Accounts Receivable 485,467 9.1% 521,877 561,018 603,094 648,326 696,951 Inventories 0.0% - - - - - Cars for Sale 598,605 11.2% 643,500 691,763 743,645 799,419 859,375 Work in Progress 166,583 3.1% 179,077 192,507 206,946 222,466 239,151 Prepaid Expenses 149,900 2.8% 161,143 173,228 186,220 200,187 215,201 Purchase Rebate Receivable 159,657 3.0% 171,631 184,504 198,341 213,217 229,208 Deposit with Supplier 17,995 0.3% 19,345 20,795 22,355 24,032 25,834 Other Current 5,294 0.1% 5,691 6,118 6,577 7,070 7,600 Total Current Assets 3,173,521 3,411,535 3,667,400 3,942,455 4,238,139 4,556,000 Non-Current Assets Land 1,700,000 31.8% 1,827,500 1,964,563 2,111,905 2,270,298 2,440,570 Building 310,311 5.8% 333,584 358,603 385,498 414,411 445,492 Equipment & Furniture 8,678 0.2% 9,329 10,029 10,781 11,589 12,458 Automotive Equipment 20,707 0.4% 22,260 23,930 25,724 27,654 29,728 Other 389 0.0% 418 450 483 519 558 Total 2,040,085 2,193,091 2,357,573 2,534,391 2,724,471 2,928,806 Good Will 123,935 2.3% 133,230 143,222 153,964 165,511 177,925 Total Assets 5,337,541 5,737,857 6,168,196 6,630,811 7,128,121 7,662,730 Liabilities & Equity Bank Loan Accounts Payable & Accruals 474,950 8.9% 969,463 1,512,063 2,107,789 2,762,241 3,481,648 Taxes Payable 810,709 15.2% 871,512 936,876 1,007,141 1,082,677 1,163,878 Current Long Term Debt Dividend Payable 200,000 3.7% 226,000 255,380 288,579 326,095 368,487 Total Current Liabilities 1,485,659 2,066,975 2,704,319 3,403,510 4,171,012 5,014,012 Long Term Debt 600,000 11.2% 645,000 693,375 745,378 801,281 861,378 Shareholders’ Equity Common Stock Retained Earnings 3,251,882 3,025,882 2,770,502 2,481,922 2,155,828 1,787,341 Total Liabilities & Equity 5,337,541 5,737,857 6,168,196 6,630,811 7,128,121 7,662,730 Performa CF 2006 2007 2008 2009 2010 Y Y Y Y Y Cash Flow from operating activities 3,025,882 2,770,502 2,481,922 2,155,828 1,787,341 Cash Flow from Investing Activities (2,193,091) (2,357,573) (2,534,391) (2,724,471) (2,928,806) Cash Flow from Financing Activities 876481.075 1424538.29 2027745.7 2692065.53 3424144.55 Total Cash 1,709,272 1,837,467 1,975,277 2,123,423 2,282,679

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