W06 Case Study Part 1 Lesson 6 2

Working Through W06 Case Study Part 1 Lesson 6 2

I ran into this case study about six months ago when a colleague asked for help before a final review. It is a financial modeling exercise that asks you to build a discounted cash flow model from scratch using provided historical data. The dataset is intentionally incomplete, which forces you to make assumptions and document them. That is the point, honestly. The core task is straightforward in theory. You take five years of income statement and balance sheet data, forecast revenue growth, calculate free cash flows, pick a discount rate, and arrive at an enterprise value. The part people get stuck on is the working capital assumption. The case gives you COGS and inventory lines but skips the accounts payable trajectory. I spent about forty minutes trying to force a linear interpolation before realizing the textbook answer key simply uses a percentage-of-sales method for all working capital line items. Once I switched to that approach, the model balanced without any plug figures. Another thing that is not obvious at first: the terminal value calculation. Most students default to a perpetuity growth formula. The case study explicitly wants you to use an exit multiple instead because the company being analyzed is in a mature industry with low growth. Using perpetuity growth in that scenario inflated the valuation by roughly eighteen percent compared to the exit multiple method. I learned that by running both and comparing against the provided solution set.

Here is how I actually approached it step by step. First, I laid out the historicals in a clean table with separate columns for each year and a notes row underneath documenting every assumption. That habit saved me during the review session because the grader can follow the logic without guessing what I changed. Second, I built the revenue forecast using a blended approach. The case hints at both a market growth rate and a market share gain, so I applied the lower of the two rates to be conservative. Third, I calculated operating expenses as a percentage of revenue rather than building line-by-line. It is faster and produces a more defensible result when the granularity of the data does not support detailed expense modeling. For the discount rate, the case provides a risk-free rate and a market risk premium. I used the CAPM formula to derive the cost of equity, then combined it with the after-tax cost of debt using the target capital structure given in the appendix. The WACC came out to about 9.2 percent, which is slightly lower than the 10 percent most students land on because they forget to adjust the debt cost for taxes. That tax shield adjustment matters more in this case than in typical textbook examples because the leverage ratio is relatively high. The free cash flow calculation itself is where most errors creep in. You start with EBIT, subtract taxes, add back depreciation and amortization, subtract capital expenditures, and then subtract the change in net working capital. The change in NWC is easy to mess up because you need to use the net figure, not the gross components. I made that mistake twice and ended up with a negative cash flow in the final year when it should have been positive. The fix was to calculate NWC as operating current assets minus operating current liabilities, then take the year-over-year delta.

One edge case that almost ruined my submission: the lease obligations. The company in the case has operating leases that are not capitalized in the financial statements provided. I initially ignored them, but the solution requires adjusting the debt figure upward by the present value of those leases. It adds maybe two percentage points to the enterprise value. I found out about this requirement from a footnote in the case appendix that is easy to miss if you are reading the main prompt only. As for download links or additional materials, the case study is typically distributed through your course learning management system. Check the module folder for the Excel template and the PDF with the company financials. If you are looking for a blank version to practice on, there is no official source I am aware of, but building your own from the raw numbers is often more useful than using a pre-formatted sheet. The biggest limitation of this case study is that it assumes you already understand basic accounting relationships. If you are unsure about the connection between net income and free cash flow, or if the concept of reinvestment rate is fuzzy, you will spend far more time on the mechanics than on the actual analysis. I would recommend reviewing the relevant chapters before starting. The case does not teach those fundamentals; it tests whether you can apply them under time pressure.

There is also a narrow scope problem. The model only covers a ten-year projection window, which is fine for a mature company but does not capture long-term structural changes. If the industry experiences a disruption during the forecast period, the outputs become unreliable. I noted that limitation in my write-up and it actually came across as a strength during grading. Showing you understand what the model cannot do is sometimes more valuable than getting the exact number right. If you want to go beyond what this case requires, the natural next step is sensitivity analysis. Build a data table that shows how the enterprise value changes when the WACC varies between 8 and 11 percent and the terminal growth rate varies between 1 and 4 percent. It takes about twenty minutes to set up and gives you a much clearer picture of which assumptions drive the valuation. Most students skip this part, which is why the exercise often feels pointless to them. It is not pointless. It is just optional unless your instructor asks for it.