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1、Kimberly-Clark Corporation (KMB)Solution to Continuing Case, Chapter 14THE COST OF CAPITAL FOR OPERATIONSThe equity cost of capital according to the CAPM (as calculated in Chapter 3) is:Equity cost of capital = 4.0% + (0.8 5.0%) = 8.0%Additional ingredients to get the cost of capital for operations
2、are:Market value of the equity = 406.9 million shares $65.24 = $26,546 millionMarket value of operations = Market value of common equity + Value of noncontrolling interest + NFO = $26,546 + 5,050 +$1,280 = $32,876 mill.(See Chapter 2 solution for the valuation of the noncontrolling interest)After-ta
3、x cost of net debt = Nominal cost of net debt (1 - t) = 5.2% (1 0.368) = 3.29%The cost of capital for operations is:Cost of capital for operations (WACC) = = 6.96%(The equity cost of capital is always higher that the cost of capital for operations if the firm has positive financial leverage.) There
4、are some dangers in applying this calculation: Look at Box 14.3 in Chapter 14. In a period where the risk-free interest rate was 3.5%, 6.96% seems a reasonable required return for KMBa 3.5% risk premium for a firm with a beta of 0.8. In Chapters 16 and 16 we will look at the sensitivity of our analy
5、sis to modifying this rate. (We will round up the required return for operations to 7% in what follows.) RESIDUAL OPERATING INCOME FOR 2008-2010Reformulated balance sheets and income statements for 2008 2010 are in the case solution for Chapter 10. The Chapter 13 solution reformulates the income sta
6、tement further to identify core (sustainable) income. From these reformulated statements, we can calculate residual operating income (ReOI) based on total operating income (OI) and core OI using the 7% required return for operations above:Amounts in millions of dollars201020092008Operating income2,5
7、00 2,815 1,801Core operating income2,164 2,325 2,053Average NOA 11,268 11,363 11,733ReOI (OI 0.07 Ave NOA) 1,711 2,020 980Core ReOI (Core OI Ave NOA) 1,375 1,530 1,232AOIG (Core) -155 298(The average NOA for 2008 uses NOA from 2007 (from the 10-K, not in the earlier statements). Core income for 2008
8、 was not calculated in the earlier solutions.) ReOI fluctuates because of unusual (non-core) items. Core ReOI appears to be fairly steady: there is not much growth over the three years here, so this looks like a no growth company. But these were recession years with flat sales growth an no NOA growt
9、h, as below. TRACKING THE DRIVERS OF RESIDUAL INCOMEReOI is driven by changes in profitability (RNOA) and changes in NOA. Changes in RNOA are in turn driven by changes in profit margin and changes in asset turnover, and changes in NOA are driven by changes in sales and changes in asset turnover. Her
10、e are the numbers, now with a focus on core OI and Core RNOA. (Many of these numbers were calculated in earlier editions of the Continuing Case).201020092008RNOA22.2% 24.8% 15.3%Core RNOA 19.2% 20.5% 17.5%Core PM from sales 9.0% 10.4% 8.5%Other Core OI/NOA 3.5% 2.9% 3.4%ATO 1.752 1.682 1.655NOA -95
11、-370 -22NOA growth rate -0.8% -3.2% -0.2%Sales growth rate 3.3% -1.5% 6.3%EPS 4.47 4.53 4.06The flat ReOI was due to fairly flat profit margins from sales, but with a slightly increasing ATO, but the flat sales growth and slight decline in NOA also contributed. Here is an analysis for earlier years,
12、 for comparison. Sustainable operating income (in millions of dollars):200420032002200120001999Net sales15,08314,02613,23214,52413,98213,007Cost of products sold10,0159,2328,5388,6158,2297,682Gross margin5,0684,7944,6945,9095,7535,325Core operating expenses2,5622,4632,3263,5713,1192,890Operating income from
