Question
(a) Estimation of growth rates for projecting financial statements is one of the steps in valuation of enterprises. Identify and discuss three sources of information
(a) Estimation of growth rates for projecting financial statements is one of the steps in valuation of enterprises. Identify and discuss three sources of information for estimation of growth rates for projecting financial statements
(b) The extracts of the financial statements of ABC Steel Fabrications for the most recent period (year 2020) is as shown below.
INCOME STATEMENT
| Sh' Million |
Revenue | 500 |
Costs (except Depreciation) | 360 |
Depreciation | 37.5 |
Total Operating Costs | 397.5 |
Earnings Before interest and tax | 102.5 |
Less interest | 13.9 |
Earning before tax | 88.6 |
Taxes @30% | 26.58 |
Net Income before preferred dividends | 62.02 |
Preferred dividends | 6 |
| 56.02 |
Common dividends | 40.8 |
Addition to retained Earnings | 15.22 |
Number of shares | 10 |
Earnings per share | 5.602 |
Dividend per share | 4.08 |
BALANCE SHEET
| Sh' Million |
ASSETS |
|
cash | 5.3 |
marketable Securities | 49.9 |
Accounts Receivable | 53 |
Inventories | 106 |
Total Current Assets | 214.2 |
Net Plant and Equipment | 375 |
Total Assets | 589.2 |
LIABILITIES AND EQUITY |
|
Accounts payable | 9.6 |
Notes payable | 69.9 |
Accruals | 27.5 |
Total Current Liabilities | 107 |
|
|
Long-Term bonds | 140.8 |
Preferred Stock | 35 |
Common stock | 160 |
Retained Earnings | 146.4 |
Common equity | 306.4 |
Total Liabilities and Equity | 589.2 |
Additional information:
(i) The revenues of ABC Steel Fabricators are expected to grow at an annual rate of 10% each year for five years and 3% each year thereafter forever.
(ii) Elements of the income statement and statement of financial position are expected to grow as revenues
(iii) Property , Plant and Equipment are expected to grow as revenues and are expected to off-set each other with depreciation during the steady state period
Required:
(i) Estimate Free Cash Flow to ABC Steel Fabricators for year 2021, 2022,2023,2024,2025 and 2026
(ii) If the estimated Average Cost of Capital is 8 % during the high growth period and 5% during the steady state period, estimate the value of operations for ABC Steel Fabricators
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