Question
ABC Limited is a manufacturing company located in Nairobi County. The company manufactures and sells various products. You have been tasked with the assignment of
ABC Limited is a manufacturing company located in Nairobi County. The company manufactures and sells various products. You have been tasked with the assignment of estimating the value of operations for the firm using discounted cash flow approach. You have been provided with the following information for the company. (i) Data for ABC limited for the most recent period YEAR 2019
Revenues Sh. 30 Million
Operating Earnings Before Interest and Tax Sh. 9 Million
Fixed Capital Investment Sh. 4 Million
Working Capital Investment Sh. 2 Million
Depreciation Sh. 2 Million
ii) Corporate tax rate relevant for ABC limited is 30 %. The before tax cost of debt of ABC ltd. is 10 %
(iii)The average beta for ABC limited is 1.5 based on market value of debt and equity.
(iv)Average return on market and risk free rate of return is 12 % and 7 % respectively.
(v) The average debt equity ratio (based on market value of debt and equity) of ABC Limited is 0.25 (vi)The Free Cash Flow (FCF) of the company is expected to grow at annual rate of 5 % for ten years and 3 % each year thereafter forever.
Required:
(a) Compute Free cash flow to ABC limited for the most recent period ( Year 2019 )
(b) Compute after tax cost of debt
(c) Compute cost of equity using the Capital Asset Pricing Model (CAPM)
(d) Compute weighted average cost of Capital
(e) Compute Terminal value for ABC limited
(f) Compute the value of operations for ABC limited
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