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AFC Ltd Sales growth 10% Current assets/Sales 15% Current liabilities/Sales 8% Net fixed assets/Sales 77% Costs of goods sold/Sales 70% Depreciation rate 10% Interest rate

AFC Ltd
Sales growth 10%
Current assets/Sales 15%
Current liabilities/Sales 8%
Net fixed assets/Sales 77%
Costs of goods sold/Sales 70%
Depreciation rate 10%
Interest rate on debt 5%
Interest paid on cash and marketable securities 4%
Tax rate 30%
Dividend payout ratio 40%
Year 0 1 2 3 4 5
Income statement
Sales 1000 1100 1210 1331 1464 1611
Costs of goods sold -700 -770 -847 -932 -1025 -1127
EBITDA 300 330 363 399 439 483
Interest payments on debt -16 -16 -16 -16 -16 -16
Interest earned on cash and marketable securities 3 3 3 3 3 3
Depreciation -100 -107 -125 -146 -170 -198
Profit before tax 187 210 225 240 256 273
Taxes -56 -63 -68 -72 -77 -82
Profit after tax 131 147 158 168 179 191
Dividends -52 -59 -63 -67 -72 -76
Retained earnings 79 88 95 101 108 114
Balance sheet
Cash and marketable securities 80 84 86 86 82 73
Current assets 150 165 182 200 220 242
Fixed assets
At cost 1070 1254 1464 1704 1977 2287
Depreciation -300 -407 -532 -679 -849 -1047
Net fixed assets 770 847 932 1025 1127 1240
Total assets 1000 1096 1200 1310 1429 1555
Current liabilities 80 88 97 106 117 129
Debt 320 320 320 320 320 320
Stock 450 450 450 450 450 450
Accumulated retained earnings 150 238 333 434 541 656
Total liabilities and equity 1000 1096 1200 1310 1429 1555
Year 0 1 2 3 4 5
Free cash flow calculation
Profit after tax 147 158 168 179 191
Add back depreciation 107 125 146 170 198
Subtract increase in current assets -15 -17 -18 -20 -22
Add back increase in current liabilities 8 9 10 11 12
Subtract increase in fixed assets at cost -184 -210 -240 -273 -310
Add back after-tax interest on debt 11 11 11 11 11
Subtract after-tax interest on cash and mkt. securities -2 -2 -2 -2 -2
Free cash flow 72 74 75 76 77
Valuing the firm
Weighted average cost of capital 12%
Long-term free cash flow growth rate 5%
Number of Shares 1000

Q1.

Using the information supplied calculate:

  1. Enterprise Value
  2. Equity Value
  3. Price per share

If the current share price is $0.55 per share what recommendation would you make to an investor who was interested in purchasing this stock?

Q2.

Given the following information about potential values for the long term growth rate:

Long Term Growth Possibilities

Rate

Probability

Best

5%

0.2

Likley

3.50%

0.5

Worst

2%

0.3

Revise your estimate of the price per share.

How would you explain the difference in the price estimates to an investor?

Q3.

The P/E multiples for three comparable companies are given below:

Comparables

A

B

C

P/E

7.14

5.73

7.91

Use these multiples and the information from question one to estimate the share price.

Explain the differences in the estimates of share price that you have made in this section?

Could you please help me with this problem? Thank you

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