AutoServe Inc.

Part 1

Autoserve Inc. is a US based manufacturer and distributor of automobile parts and accessories. Recently, the companys management has been in discussion regarding diversifying the companys revenue stream and streams and is considering the purchase of a privately held European company called SnapTools which manufactures small handheld tool and bolts. Management is therefore seeking to estimate the value of SnapTools and has asked the companys finance team to determine the intrinsic value of the companys share.

The finance team has obtained the following data for their assessment:

• Tooltronic Inc. is a publicly traded company which is involved in a business of making handheld tools in Europe and as such is a good comparable for SnapTools
• The following data applies to Tooltronic Inc:

Tax Rate	Market Capitalization in Thousands	Net debt in thousand	Beta
35.5%	16,000	12,000	0.75

• In Europe the nominal risk free rate of interest is around 4.5%
• The expected return on the equity market in Europe is 9%
• The following Applies to SnapTools:

Tax Rate	Value of Equity in Thousands	Net Debt in Thousands	Interest Rate on Debt
$30.0	5,000	3,300	5.5%

Instructions:

1. Based on the above information, calculate the Weighted Average Cost of Capital for SnapTools. Round all answers to four decimal places.

Part 2

The finance team has also complied the following forecasted financial information on SnapTool to assist in the valuation (Dollar amounts are in thousands):

	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5
Forecasted Revenue Growth	-	20%	20%	15%	15%	10%
Sales Revenue	1,000,000
Operating Cost	650,000	780,000	936,000	1,076,400	1,333,080	1,466,390
EBIT	350,000
Taxes @ 30%	105,000
Depreciation	20,000	20,000	20,000,	20,000	20,000	20,000
Changes in Net Working Capital	15,000	18,000	21,600	19,440	22,360	17,340
Free Cash Flow

• It is estimated that SnapTool will experience a long-term cash Growth rate of 4%.

Instructions

A) Using the data above and the value calculated in the WACC in PART 1 A, calculate the fair value of equity for SnapTools.

B) Assuming that there are 1 million shares outstanding in SnapTools which currently trade at $5 Per share, indicate whether the shares are currently over or undervalued and if Autoserve should continue to pursue the purchase of the company.