CHAPTER THREE

COST OF CAPITAL

Based on the Offer Price of up to ₱ 5.05 per Offer Share, the Company estimates that the total
proceeds, total expenses, and the net proceeds from the Offer will be:

Estimated Amounts
(₱ millions)
Total proceeds from the Offer ₱ 7,039.2
Less: Expenses
Underwriting and selling fees (including fees to be paid to the
189.2
PSE Trading Participants, incl. GRT)
Documentary Stamps Tax 7
SEC registration, filing and research fees 3.3
PSE Processing Fees 20
IPO Tax 70.4
Estimated professional fees (including legal, audit, and
7.5
financial advisory fees)
Others 2.0
Total estimated expenses from the Offer 299.4
Estimated net proceeds from the Offer ₱ 6,739.8

Growth rate of dividends is computed as follows:

Dividend Amount
Year
per Share
2018 *0.0845

2017 0.08

2016 0.00
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑦𝑒𝑎𝑟 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑
{∑ [(𝑃𝑟𝑒𝑣𝑖𝑜𝑢𝑠 𝑦𝑒𝑎𝑟 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 ) − 1 𝑥 100]}
𝑔=
𝑇𝑜𝑡𝑎𝑙 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑦𝑒𝑎𝑟𝑠
5.625
𝑔=
1
𝑔 = 5.625
Current value of common stock is ₱11.58.
Risk free rate of return is 3.356
The beta coefficient of the firm is 0.36
Market return is 9.6
NOTES:

 The divided on 2018 is an assumed figure based on the company dividend policy that maintains
an annual cash and/or dividend pay-out of up to 25% of its net profit after tax from the preceding
year.

 The corporation was only incorporated last 2015. No available financial records were found
prior to that year. Due to this limitation, only available dividend data since the December 2015
incorporation were used in computing the growth rate.

 The beta coefficient was based on the data available at

https://www.marketwatch.com/investing/stock/wlcon?countrycode=ph

 The market return is based on the average market return of 9.6% per year.
https://www.marketwatch.com/investing/stock/wlcon?countrycode=ph

COST OF COMMON STOCK EQUITY

a. USING CONSTANT GROWTH VALUATION (GORDON GROWTH) MODEL

𝐷1
𝑟𝑠 = + 𝑔
𝑃0

0.0845
𝑟𝑠 = + .05625
11.58

𝑟𝑠 = 6.35%
WHERE: 𝒓𝒔 = required return on common stock | 𝑫𝟏 = per share dividend expected at end of year 1 |
𝑷𝟎 = value of common stock | 𝒈 = constant rate of growth

b. USING CAPITAL ASSET PRICING MODEL (CAPM)

𝑟𝑠 = 𝑅𝐹 + [ 𝑏 𝑥 (𝑟𝑚 − 𝑅𝐹 )]

𝑟𝑠 = 3.356 + [ 0.36 𝑥 (9.6 − 3.356)]

𝒓𝒔 = 𝟓. 𝟔𝟎%

WHERE: 𝒓𝒔 = required return on common stock | 𝑹𝑭 = risk free rate of return |

𝒓𝒎 = market return | 𝒃 = beta coefficient
COST OF RETAINED EARNINGS
𝑟𝑟 = 𝑟𝑠
𝐷1
𝑟𝑟 = + 𝑔
𝑃0

0.0845
𝑟𝑟 = + .05625
11.58

𝒓𝒓 = 𝟔. 𝟑𝟓%

WHERE: 𝒓𝒓 = required return on common stock | 𝑫𝟏 = per share dividend expected at end of year
1 | 𝑷𝟎 = value of common stock | 𝒈 = constant rate of growth

COST OF NEW ISSUES OF COMMON STOCK

𝐷1
𝑟𝑛 = + 𝑔
𝑁𝑛
0.0845
𝑟𝑛 = + 0.05625
4.8352
𝒓𝒏 = 𝟕. 𝟑𝟕%

WHERE: 𝒓𝒏 = required return on issuance of new shares | 𝑫𝟏 = per share dividend expected at end
of year 1 | 𝑵𝒏 = net proceeds per share | 𝒈 = constant rate of growth

𝑻𝒐𝒕𝒂𝒍 𝒏𝒆𝒕 𝒑𝒓𝒐𝒄𝒆𝒆𝒅𝒔

𝑵𝒏 =
𝒕𝒐𝒕𝒂𝒍 𝒏𝒖𝒎𝒃𝒆𝒓 𝒐𝒇 𝒔𝒉𝒂𝒓𝒆𝒔 𝒊𝒔𝒔𝒖𝒆𝒅
=6,739,800,000/1,393,906,200
= 4.8325
 CHAPTER FOUR
RELEVANT CASH FLOWS
4.1 COST OF PROJECT/INVESTMENT/OBLIGATIONS TO BE SETTLED
4.2 PROJECTIONS OF INCREMENTAL OPERATING CASH FLOW
4.2.1 EXPECTED SCENARIO
4.2.2 WORST CASE SCENARIO
4.3 TERMINAL CASH FLOW PROJECTION
 CHAPTER FIVE
DIVIDEND POLICY
5.1 CURRENT DIVIDEND POLICY
5.2 HISTORICAL EARNINGS VERSUS DIVIDENDS
5.3 PROJECTIONS
 CHAPTER SIX
WORKING CAPITAL
The working capital refers to the cash a company needs for its day-to-day operations. The faster
the company expands, the more cash it will need. Thus, in the case of Wilcon Depot Inc.'s Store
Expansion Network project, additional cash will be required to keep up with revenue growth.
In general, a company's working capital needs will grow as revenues grow. Thus since the
revenue of Wilcon Depot is projected to increase to 44%, same is true with its working capital.
However, another allocation for the proceeds from the issuance of the common stock is the repayment
of debt that is estimated to amount 428.1 million that is projected to be disbursed from 2017 to 2018.
Thus, we assume that the 44% revenue growth can be only indicative of the changes in total current
assets but not with the change in total current liabilities. In line with this, the current ratio at the year
2016 cannot also be used to compute for the projected current liabilities.
Thus, the group decided to:
• use the 44% revenue growth as a basis for the change in current asset items;
• assume that all the short-term debt will be repaid by 2017 and no borrowings will be made
due to sufficiency of cash and cash equivalents;
• take into account the actual maturity schedule of the long-term debt to project the amount
of long-term debt; and
• all the other items of the current liabilities would still be based with the 44% revenue
growth projection.
The Company’s principal liquidity requirements are for both operating and capital expenditures
which are comprised of inventory purchases, store improvements, logistical infrastructure and store
network expansion among others.
The Company’s principal sources of liquidity are from internally generated cash from
operations and short-term bank loans. For the nine months ended September 30, 2016, the Company
had, on a pro-forma basis, total current assets of ₱8,876 million, of which cash and cash equivalents
accounted for 2.65% or ₱235 million. This was against the Company’s total current liabilities of ₱5,502
million, 86.15% of which, or ₱4,740 million, were non-interest bearing payables.
The Company expects a growth in its working capital due to increased sales and market share
expansion. Moving forward, the Company expects to fund these requirements from its operating cash
flows and proceeds of the Offer. The Company intends to use a portion of the proceeds from the Offer
to partially pay off debt financing arrangements and to support working capital requirements.

6.1 CURRENT ASSETS PROJECTION

2017
Years 2016 Actual Projected 2018 2019 2020 2021
Current
Assets
Cash and ₱ ₱ ₱ ₱ ₱ ₱ ₱
cash 638,072, 3,016,815, 918,823,81 1,323,106,2 1,905,273,0 2,743,593,2 3,950,774,2
equivalent 093 150 4 92 61 07 18
s
Short-term 0 600,580,7 0 0 0 0 0
investment 15
s
 Trade and 422,593, 552,025,0 608,534,76 876,290,06 1,261,857,6 1,817,075,0 2,616,588,0
other 586 50 4 0 86 68 98
receivable
s
Merchandi 6,575,84 6,968,144, 9,469,215,2 13,635,669, 19,635,364, 28,274,925, 40,715,892,
se 3,901 107 17 913 675 132 190
inventorie
s
Other 769,937, 610,372,3 1,108,709,2 1,596,541,3 2,299,019,5 3,310,588,1 4,767,246,9
current 004 27 86 71 75 88 91
assets
Total ₱ ₱ ₱ ₱ ₱ ₱ ₱
Current 8,406,44 11,747,93 12,105,283, 17,431,607, 25,101,514, 36,146,181, 52,050,501,
Assets 6,584 7,349 080.96 636.58 996.68 595.22 497.11

CHANGE ₱ ₱ ₱ ₱ ₱ ₱ ₱
IN - 3,341,490, 3,698,836,4 5,326,324,5 7,669,907,3 11,044,666, 15,904,319,
CURREN 765.00 96.96 55.62 60.10 598.54 901.90
T
ASSETS

PERCEN 40% 44% 44% 44% 44% 44%

TAGE
CHANGE

The formula used to get the projections is to multiply the 44% revenue growth rate to the
previous year’s amount and then add it to the previous year’s amount. As depicted in the table above,
the actual results for 2017 is near its projected change in working capital which verifies the computation
of the projections.
6.2 CURRENT LIABILITIES PROJECTION
2017
Years 2016 Actual Projected 2018 2019 2020 2021
Current
Liabilities
Short-term ₱ ₱ ₱ ₱ ₱ ₱ ₱
debt 445,000, - - - - - -
000
Current 278,461, 155,000,0 285,769,23 244,615,38 ₱ ₱ 0
portion of 539 00 0 5 80,000,000 38,974,359
long-term
debt
Trade and 3,619,67 3,491,311
other 9,500 ,355 5,212,338, 7,505,767, 10,808,305 15,563,959 22,412,101,
payables 480 411 ,072 ,304 397.56
Income tax 154,094, 78,888,67
payable 765 5 221,896,46 319,530,90 460,124,50 662,579,28 954,114,168
2 4.70 3 3.99 .95
Total ₱ ₱ ₱ ₱ ₱ ₱ ₱
Current 4,497,23 3,725,200 5,720,004, 8,069,913, 11,348,429 16,265,512 23,366,215,
Liabilities 5,804 ,030 172 701 ,575 ,947 567
 CHANGE ₱ -₱ ₱ ₱ ₱ ₱ ₱
IN - 772,035,7 1,222,768, 2,349,909, 3,278,515, 4,917,083, 7,100,702,6
CURREN 74.00 367.91 528.65 874.38 371.92 19.66
T
LIABILIT
IES

PERCEN -17% 27% 41% 41% 43% 44%

TAGE
CHANGE

The projections above are computed as follows:

• For the short-term debt, it is assumed to be zero because net proceeds from the issuance will be
allocated for the payment of these debts. To support this assumption is the actual zero balance
of the short-term debts for 2017. Throughout the five year period, the company is assumed to
satisfy its working capital requirements through its operating cash inflows.
• For the current portion of the long-term debt, the projections are based on the financial data
provided by the Company’s 2016 Audited Financial Statements and is calculated as follows:

Terms Principal 2016 Outstanding

Balance
Loan 1 Quarterly installment payment until ₱ 500,000,000 ₱ 300,000,000
December 2019
Loan 2 Quarterly installment payment until 320,000,000 280,000,000
March 2020
Loan 3 Monthly Installment payment until 210,000,000 150,769,231
August 2021
Loan 4 Monthly Installment payment until 170,000,000 122,051,282
August 2021
Loan 5 Monthly Installment payment until 100,000,000 75,000,000
March 2018
Total ₱ 1,300,000,000 ₱ 927,820,513
Current Portion ₱ 278,461,539
Non-current Portion ₱ 649,358,974
Loan Quarters/ Quarterly/M 2017 2018 2019 2020 2021
Months to onthly Payment Payment Payment Payment Payment
left to pay Installment
(as of 2016)
1 25,000,000 100,000,000 100,000,000 100,000,000
12
2 21,538,462 86,153,846 86,153,846 86,153,846 21,538,462
13
3 2,692,308 32,307,692 32,307,692 32,307,692 32,307,692 21,538,461
56
4 2,179,487 26,153,846 26,153,846 26,153,846 17,435,897
56 26,153,846
5 5,000,000 60,000,000 15,000,000
15
304,615,385 259,615,385
2017 Adjustment* (26,153,845) 26,153,845
Current Portion for the Prior Year 278,461,539 285,769,230 244,615,385 80,000,000 38,974,359

*The current portion for 2017 is adjusted to match it with the actual presentation in the Balance Sheet.
 • For the “trade and other payables” and “income tax payable” accounts, the 44%
revenue growth is used.
The following table shows the total working capital projections, changes in working capital and
the percentage change for each year:
2017
Years 2016 Actual Projected 2018 2019 2020 2021
WORKIN ₱ ₱ ₱ ₱ ₱ ₱ ₱
G 3,909,21 8,022,737, 6,385,278, 9,361,693, 13,753,085 19,880,668 28,684,285
CAPITAL 0,780 319 909 936 ,422 ,648 ,931

CHANGE ₱ ₱ ₱ ₱ ₱ ₱ ₱
IN - 4,113,526, 2,476,068, 2,976,415, 4,391,391, 6,127,583, 8,803,617,
WORKIN 539.00 129.05 026.97 485.71 226.62 282.24
G
CAPITAL

PERCEN 105% 63% 47% 47% 45% 44%

TAGE
CHANGE

The current ratio and quick ratio as key performance indicators are projected to be:
2017
2016 Actual Projected 2018 2019 2020 2021
CURRENT RATIO
1.87 3.15 2.12 2.16 2.21 2.22 2.23
QUICK RATIO
0.24 1.12 0.27 0.27 0.28 0.28 0.28

The increase in the current ratio and quick ratio is a good indication that the company has the
ability to cover its short-term liabilities.
The table below shows the change in net working capital that is used in the computation of the
relevant cash flows of the company:
Change In Current Assets ₱ 43,644,054,913.11
Less: Change In Current Liabilities 18,868,979,762.52
Net Change In Working Capital ₱ 24,775,075,150.60
 CHAPTER SEVEN
DEFENSE FOR THE INVESTMENT TO THE PROJECT

7.1 NET PRESENT VALUE (NPV)

7.1.1 COST OF CAPITAL
7.1.2 RISK-ADJUSTED DISCOUNT RATE
7.2 INTERNAL RATE OF RETURN
7.3 PAYBACK PERIOD
CHAPTER EIGHT
CONCLUSION