Forecasting Balance Sheets and Cash Flow Statements for DCF Analyses. Joseph Emanuele ASA, CFA, CPA/ABV/CFF October 8, 2017

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1 Forecasting Balance Sheets and Cash Flow Statements for DCF Analyses Joseph Emanuele ASA, CFA, CPA/ABV/CFF October 8, 2017

2 What we are NOT doing today: We are NOT going to be learning how to prepare prospective financial statements (forecasts or projections) in accordance with AICPA standards.

3 What we ARE doing today: Learning how to take historical financial information and use it to create supportable assumptions in a discounted cash flow model.

4 Balance Sheet and Cash Flow Statement Items Working Capital Fixed Assets Long-Term Debt

5 Discounted Cash Flow Model For the Twelve Month Period Ending December 31, Total Revenue $ 25,993 $ 27,526 $ 29,178 $ 30,929 $ 32,784 Total Cost of Revenue 16,947 17,892 18,907 20,135 21,310 Gross Margin 9,045 9,634 10,271 10,794 11,475 Total Operating Expenses 7,928 8,506 8,987 9,433 9,999 EBITDA 1,118 1,129 1,284 1,361 1,475 Depreciation & Amortization $ 366 $ 433 $ 504 $ 245 $ 293 EBIT ,115 1,183 Interest Expense Earnings Before Taxes ,061 1,137 Income Taxes Forecast After-Tax Income $ 666 $ 623 $ 718 $ 1,061 $ 1,137 Cash Flow Add: Depreciation & Amortization After-Tax Gross Cash Flow 1,032 1,056 1,222 1,307 1,429 Decrease / (Increase) in Working Capital (4) (54) (516) (392) (434) Less: Capital Expenditures (260) (275) (292) (309) (328) (Decrease) / Increase in Long-Term Debt (295) (350) (200) (200) (200) Free Cash Flow $ 472 $ 376 $ 214 $ 405 $ 467

6 Historical Income Statement Year-Ended Year-Ended Year-Ended Year-Ended Year-Ended 12/31/ /31/ /31/ /31/ /31/2017 Income Statement Net Sales $ 20,000 $ 21,000 $ 22,425 $ 23,625 $ 24,755 Cost of Sales 12,400 13,272 14,397 15,333 16,116 Gross Profit 7,600 7,728 8,028 8,292 8,639 Operating Expenses 6,420 6,636 6,929 7,111 7,526 Operating Profit 1,180 1,092 1,099 1,181 1,114 All Other Expenses (net) Profit Before Taxes $ 960 $ 861 $ 852 $ 969 $ 891

7 Historical Balance Sheet 12/31/ /31/ /31/ /31/ /31/2017 Assets Cash & Equivalents $ 1,800 $ 2,250 $ 2,200 $ 2,225 $ 2,675 Trade Receivables - (net) 3,200 3,225 3,350 3,725 3,850 Inventory 2,525 2,600 3,000 3,225 3,375 All Other Current Assets Total Current Assets 7,850 8,450 9,000 9,750 10,500 Fixed Assets (gross) 1,400 1,725 1,925 2,125 2,335 Accumulated Depreciation (140) (415) (700) (1,025) (1,335) Fixed Assets (net) 1,260 1,310 1,225 1,100 1,000 Intangibles All Other Non-Current Assets Total Assets $ 9,835 $ 10,495 $ 10,965 $ 11,600 $ 12,265 Liabilities Accounts Payable $ 1,950 $ 2,165 $ 2,185 $ 2,315 $ 2,465 Cur. Mat.-L/T/D Income Taxes Payable All Other Current Liabilities 1,200 1,325 1,375 1,450 1,650 Total Current Liabilities 3,405 3,830 3,854 4,052 4,496 Long Term Debt 1,000 1,500 2,000 2,500 2,000 Deferred Taxes All Other Non-Current Liabilities Total Liabilities 5,190 6,055 6,009 6,735 6,771 Stockholders' Equity 4,645 4,440 4,956 4,865 5,494 Total Liabilities & Equity $ 9,835 $ 10,495 $ 10,965 $ 11,600 $ 12,265

8 Activity Ratios Accounts Receivable Accounts Receivable Turnover : Annual Sales Accounts Receivable Days Outstanding in Accounts Receivable : 365 A/R Turnover

9 Activity Ratios Inventory Inventory Turnover : Cost of Goods Sold Inventory Days Inventory : 365 Inventory Turnover

10 Activity Ratios Accounts Payable Accounts Payable Turnover : Cost of Sales Accounts Payable Days Payables Outstanding : 365 A/P Turnover

11 Activity Ratios Net Working Capital Sales to Net Working Capital: Sales Net Working Capital

12 Working Capital Estimation ACTUAL FORECAST 12/31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/2022 Revenues $ 20,000 $ 21,000 $ 22,425 $ 23,625 $ 24,755 $ 25,993 $ 27,526 $ 29,178 $ 30,929 $ 32,784 Cost of Goods Sold 12,400 13,272 14,397 15,333 16,116 16,947 17,892 18,907 20,135 21,310 Operating Expenses 6,420 6,636 6,929 7,111 7,526 7,928 8,506 8,987 9,433 9,999 12/31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/2022 Current Assets Cash & Equivalents $ 1,800 $ 2,250 $ 2,200 $ 2,225 $ 2,675 $ 2,498 $ 2,330 $ 2,462 $ 2,584 $ 2,740 Trade Receivables - (net) 3,200 3,225 3,350 3,725 3,850 3,917 4,148 4,397 4,660 4,940 Inventory 2,525 2,600 3,000 3,225 3,375 3,482 3,676 3,885 4,137 4,379 All Other Current Assets Total Current Assets $ 7,850 $ 8,450 $ 9,000 $ 9,750 $ 10,500 $ 10,547 $ 10,843 $ 11,327 $ 12,001 $ 12,714 Current Liabilities Accounts Payable $ 1,950 $ 2,165 $ 2,185 $ 2,315 $ 2,465 $ 2,554 $ 2,696 $ 2,849 $ 3,034 $ 3,211 Income Taxes Payable All Other Current Liabilities 1,200 1,325 1,375 1,450 1,650 1,560 1,652 1,459 1,546 1,639 Total Current Liabilities $ 3,205 $ 3,580 $ 3,589 $ 3,777 $ 4,201 $ 4,243 $ 4,485 $ 4,454 $ 4,735 $ 5,014 Net Working Capital $ 4,645 $ 4,870 $ 5,411 $ 5,973 $ 6,299 $ 6,303 $ 6,357 $ 6,874 $ 7,266 $ 7,700 Net Working Capital as a % of Revenue 23.2% 23.2% 24.1% 25.3% 25.4% 24.3% 23.1% 23.6% 23.5% 23.5% Yr/yr Working Capital (Increase)/Reduction NA $ (225) $ (541) $ (562) $ (326) $ (4) $ (54) $ (516) $ (392) $ (434) RMA Working Capital as a % of Revenue 24.5% Days' Operating Expenses in Cash Days' Revenue Outstanding in A/R Days' Inventory Other Current Assets as a % of Revenue 1.6% 1.8% 2.0% 2.4% 2.4% 2.5% 2.5% 2.0% 2.0% 2.0% Days' Payables Outstanding Income Taxes Payable as a % of Revenue 0.3% 0.4% 0.1% 0.0% 0.3% 0.5% 0.5% 0.5% 0.5% 0.5% Other Current Liabilities as a % of Revenue 6.0% 6.3% 6.1% 6.1% 6.7% 6.0% 6.0% 5.0% 5.0% 5.0%

13 Discounted Cash Flow Model For the Twelve Month Period Ending December 31, Total Revenue $ 25,993 $ 27,526 $ 29,178 $ 30,929 $ 32,784 Total Cost of Revenue 16,947 17,892 18,907 20,135 21,310 Gross Margin 9,045 9,634 10,271 10,794 11,475 Total Operating Expenses 7,928 8,506 8,987 9,433 9,999 EBITDA 1,118 1,129 1,284 1,361 1,475 Depreciation & Amortization $ 366 $ 433 $ 504 $ 245 $ 293 EBIT ,115 1,183 Interest Expense Earnings Before Taxes ,061 1,137 Income Taxes Forecast After-Tax Income $ 666 $ 623 $ 718 $ 1,061 $ 1,137 Cash Flow Add: Depreciation & Amortization After-Tax Gross Cash Flow 1,032 1,056 1,222 1,307 1,429 Decrease / (Increase) in Working Capital (4) (54) (516) (392) (434) Less: Capital Expenditures (260) (275) (292) (309) (328) (Decrease) / Increase in Long-Term Debt (295) (350) (200) (200) (200) Free Cash Flow $ 472 $ 376 $ 214 $ 405 $ 467

14 Working Capital Estimation - Simplified ACTUAL FORECAST 12/31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/ /31/2022 Revenues $ 20,000 $ 21,000 $ 22,425 $ 23,625 $ 24,755 $ 25,993 $ 27,526 $ 29,178 $ 30,929 $ 32,784 Working Capital as a % of Revenues 23.2% 23.2% 24.1% 25.3% 25.4% 24.5% 24.5% 24.5% 24.5% 24.5% Ending Working Capital Balance $ 4,645 $ 4,870 $ 5,411 $ 5,973 $ 6,299 $ 6,368 $ 6,744 $ 7,149 $ 7,578 $ 8,032 Working Capital (Increase)/Decrease NA (225) (541) (562) (326) (69) (376) (405) (429) (455)

15 Activity Ratios Fixed Assets Fixed Asset Turnover: Sales Fixed Assets

16 Fixed Asset Estimation - Historical Historical Debt Activity and Interest Expense Period FYE FYE FYE FYE FYE Average Current Year Ending Balance $ 1,200 $ 1,750 $ 2,265 $ 2,775 $ 2,295 Previous Year Ending Balance NA 1,200 1,750 2,265 2,775 Change in Total Interest-Bearing Debt NA $ 550 $ 515 $ 510 $ (480) Average Debt Balance 2,134 NA 1,475 2,008 2,520 2,535 Average Debt Balance as a % of Revenue 9.5% NA 7.0% 9.0% 10.7% 10.2% Interest Expense $ 80 $ 60 $ 59 $ 80 $ 101 $ 101 Interest Expense as a % of Avg Debt Bal. 3.8% NA 4.0% 4.0% 4.0% 4.0% Interest Expense as a % of Revenue 0.4% 0.3% 0.3% 0.4% 0.4% 0.4% Revenue $ 22,361 $ 20,000 $ 21,000 $ 22,425 $ 23,625 $ 24,755

17 Fixed Asset Estimation - Forecast For the Twelve Month Period Ending December 31, Total Revenue $ 25,993 $ 27,526 $ 29,178 $ 30,929 $ 32,784 Beginning Balance - Total Fixed Assets 1, Capital Expenditures Fixed Assets 1,260 1,169 1, Capital Expenditures as a % of Revenue 1.00% 1.00% 1.00% 1.00% 1.00% Depreciation Assumptions as to Depreciable Lives: Beg. Dep. Existing Fixed Assets - avg life 3.0 Capital Additions - avg life 4.0 Beginning Balance $ 333 $ 333 $ 333 $ - $ Additions Additions Additions Additions Additions 41 Total Depreciation $ 366 $ 433 $ 504 $ 245 $ 293 As a % of Revenue 1.4% 1.6% 1.7% 0.8% 0.9% Net Fixed Assets $ 894 $ 737 $ 525 $ 589 $ 624 As a % of Revenue 3.4% 2.7% 1.8% 1.9% 1.9%

18 Discounted Cash Flow Model For the Twelve Month Period Ending December 31, Total Revenue $ 25,993 $ 27,526 $ 29,178 $ 30,929 $ 32,784 Total Cost of Revenue 16,947 17,892 18,907 20,135 21,310 Gross Margin 9,045 9,634 10,271 10,794 11,475 Total Operating Expenses 7,928 8,506 8,987 9,433 9,999 EBITDA 1,118 1,129 1,284 1,361 1,475 Depreciation & Amortization $ 366 $ 433 $ 504 $ 245 $ 293 EBIT ,115 1,183 Interest Expense Earnings Before Taxes ,061 1,137 Income Taxes Forecast After-Tax Income $ 666 $ 623 $ 718 $ 1,061 $ 1,137 Cash Flow Add: Depreciation & Amortization After-Tax Gross Cash Flow 1,032 1,056 1,222 1,307 1,429 Decrease / (Increase) in Working Capital (4) (54) (516) (392) (434) Less: Capital Expenditures (260) (275) (292) (309) (328) (Decrease) / Increase in Long-Term Debt (295) (350) (200) (200) (200) Free Cash Flow $ 472 $ 376 $ 214 $ 405 $ 467

19 Long Term Debt- Historical Historical Debt Activity and Interest Expense Period FYE FYE FYE FYE FYE Average Current Year Ending Balance $ 1,200 $ 1,750 $ 2,265 $ 2,775 $ 2,295 Previous Year Ending Balance NA 1,200 1,750 2,265 2,775 Change in Total Interest-Bearing Debt NA $ 550 $ 515 $ 510 $ (480) Average Debt Balance 2,134 NA 1,475 2,008 2,520 2,535 Average Debt Balance as a % of Revenue 9.5% NA 7.0% 9.0% 10.7% 10.2% Interest Expense $ 80 $ 60 $ 59 $ 80 $ 101 $ 101 Interest Expense as a % of Avg Debt Bal. 3.8% NA 4.0% 4.0% 4.0% 4.0% Interest Expense as a % of Revenue 0.4% 0.3% 0.3% 0.4% 0.4% 0.4% Revenue $ 22,361 $ 20,000 $ 21,000 $ 22,425 $ 23,625 $ 24,755

20 Long Term Debt- Forecast As of For the Twelve Month Period Ending December 31, Forecast Debt Activity and Interest Expense Current Portion of LT Debt Beginning Principal $ 295 $ 295 $ - $ - $ - $ - Change in Balance (295) Ending Principal Average Balance Interest 4.00% $ 6 $ - $ - $ - $ % LT Debt 1 Beginning Principal $ 1,000 $ 1,000 $ 1,000 $ 900 $ 800 $ 700 Change in Balance - (100) (100) (100) (100) Ending Principal 1, Average Balance 1, Interest 4.00% $ 40 $ 38 $ 34 $ 30 $ % LT Debt 2 Beginning Principal $ 950 $ 950 $ 950 $ 750 $ 650 $ 550 Change in Balance - (200) (100) (100) (100) Ending Principal Average Balance Interest 4.00% $ 38 $ 34 $ 28 $ 24 $ % LT Debt 3 Beginning Principal $ 50 $ 50 $ 50 $ - $ - $ - Change in Balance - (50) Ending Principal Average Balance Interest 4.00% $ 2 $ 1 $ - $ - $ % LT Debt 4 Beginning Principal $ - $ - $ - $ - $ - $ - Change in Balance Ending Principal Average Balance Interest 4.00% $ - $ - $ - $ - $ % Total Ending Balance 2,295 2,000 1,650 1,450 1,250 1,050 Total Change in Balance (295) (350) (200) (200) (200) Total Average Balance 2,148 1,825 1,550 1,350 1,150 Total Interest Expense $ Interest Expense as a % of Total Avg Bal. 0.0% 4.0% 4.0% 4.0% 4.0% 4.0%

21 Discounted Cash Flow Model For the Twelve Month Period Ending December 31, Total Revenue $ 25,993 $ 27,526 $ 29,178 $ 30,929 $ 32,784 Total Cost of Revenue 16,947 17,892 18,907 20,135 21,310 Gross Margin 9,045 9,634 10,271 10,794 11,475 Total Operating Expenses 7,928 8,506 8,987 9,433 9,999 EBITDA 1,118 1,129 1,284 1,361 1,475 Depreciation & Amortization $ 366 $ 433 $ 504 $ 245 $ 293 EBIT ,115 1,183 Interest Expense Earnings Before Taxes ,061 1,137 Income Taxes Forecast After-Tax Income $ 666 $ 623 $ 718 $ 1,061 $ 1,137 Cash Flow Add: Depreciation & Amortization After-Tax Gross Cash Flow 1,032 1,056 1,222 1,307 1,429 Decrease / (Increase) in Working Capital (4) (54) (516) (392) (434) Less: Capital Expenditures (260) (275) (292) (309) (328) (Decrease) / Increase in Long-Term Debt (295) (350) (200) (200) (200) Free Cash Flow $ 472 $ 376 $ 214 $ 405 $ 467

22 Discounted Cash Flow Model Terminal Value Terminal Cash Flow= Final Year FCF x (1+Long Term Growth Rate) (Discount Rate Long Term Growth Rate) Terminal Cash Flow= $467 x (1+Long Term Growth Rate) (Discount Rate Long Term Growth Rate)

23 Discounted Cash Flow Model Terminal Value Terminal Value Working Capital Change - Residual Year Net Income - Residual Year $ 1,171 Add: Depreciation 338 Revenue - Residual Year $ 33,768 Less: Capital Expenditures (338) Debt-Free ONWC % 23.5% Less: Working Capital Increase (231) Debt-Free ONWC 7,931 Prior Year Debt-Free ONWC 7,700 Cash Flow $ 940 Net Increase $ 231 Divide by: Capitalization Rate Discount Rate 21.0% Less: Long-Term Sustainable Growth Rate 3.0% Capitalization Rate 18.0% Terminal Value $ 5,221

24 Questions??

25 Thank you!

A/P Turnover (Activity)

A/P Turnover (Activity) 1a COGS Avg A/P 1b A/R Turnover (Activity) 2a Net Credit Sales Avg Net Receivables [A/R quality & success in collecting outstanding A/R] 2b A/R Turnover in Days (Activity) 3a Avg