ABCLimited is a private company located in Nairobi County. The company manufactures and sells various products. You have been tasked with the assignment of valuing the private firm using discounted cash flow approach. You have been provided with the following information for the company and that of ten similar firms in the industry.

(i)Data for ABC limited for the most recent period

Revenues

Sh. 30 Million

Earnings Before Interest and Tax

Sh. 10 Million

Capital Expenditure

Sh. 4 Million

Working Capital Investment

Sh. 2 Million

Depreciation

Sh. 2 Million

(ii)Corporate tax rate relevant for ABC limited is 25%. The before tax cost of debt of ABC ltd. is 10 %

(iii)Extracts from the statement of financial position for the most recent period is as shown below

Ordinary Share Capital (Sh. 1.5 Par value)

Sh. 150 Million

Borrowings

Sh. 75 Million

(iv)The average beta of ten comparable companies in the same industry as ABC limited is 1.5 based on market value of debt and equity.

(v)On average, market value of equity is twice the book value whereas market value of debt equals to the book value.

(vi)The average debt equity ratio of the industry is 0.45

(vii)Average return on market and risk free rate of return is 12 % and 5 % respectively.

Additional information:

(a)The firm expects Revenues, Earnings before Interest and Tax, Capital Expenditure, Investment in Working Capital and Depreciation to grow at an annual rate of 6 % each year for 20 years.

(b)After the twenty year growth period, the growth in Revenues, Earnings before Interest and Tax and Investment in Working Capital will decline to stable 3 % each year into the foreseeable future.

(c)During the steady state period, investment in fixed capital and Non-cash charges will offset each other.

Required:

(a)Compute free cash flow to ABC limited for the most recent period

(3 Marks)

(b)Compute weighted average cost of Capital

(10 Marks)

(c)Compute Terminal value for ABC limited

(5 marks)

(d)Compute the value of operations of ABC limited