erences Mailings Review View Tell me what you want to do... A. E E AL aly - A cDe . 1 No Spac... Heading 1 Heading 2 Title Subtit T Normal Paragraph Question1 Styles 40 Marks Your company has appointment you to estimate the value of Killarney under alternative assumptions about the company's performance. 1.1. Using the discounted cash flow (DCF) approach to valuation and the following assumptions, provide an estimate of Killarney's value This year sales are expected to be R750 million. They are expected to grow at a rate of 5 percent per year for the next four years, and then at 3 percent per year forever The pre-tax operating margin currently at 15 percent will grow at a rate of 1 percent every year for four years and then stabilize at 20 percent forever The working capital requirement to sales ratio will remain at its current level of 18 percent forever Capital expenditure will be R50 million this year and will grow at the same rate as the sales Annual depreciation expense for the current year will be R50 million and then grow at the same rate as the capital expenditure Killarney has R500 million of debt outstanding. It can borrow at 6 percent Portal's income tax rate is 40 percent Killarney's beta is 1.05. The risk-free rate and the market risk premium are 5 percent BI 2C 6 at A- I Normal 1 No Spac... Heading 1 Heading 2 Title Paragraph Styles Portal's income tax rate is 40 percent Killarney's beta is 1.05. The risk-free rate and the market risk premium are 5 percent The debt-to-total-capital ratio of Portal, at market value, is 50 percent 12. Assume that Killarney's performance can be improved through the following: I. A half a percentage point increase in the growth rate in sales every year. IL An improvement in operating margin after tax of 1 percent per year, every year III. A reduction of the ratio working capital requirement to sales from 18 percent to 16 percent immediately I IV. A recapitalization that could lower Killarney's weighted average cost of capital by 30 basis points Show how each of these actions will change the company's estimated DCF value. What will the change in value be if all actions are implemented simultaneously? Why is the sum of the changes in value resulting from each action smaller than the change in value resulting from their cumulative effects? QUESTION2 20 Marks Agrico is considering the acquisition of Thompson. Agrico has two million shares outstanding selling at R30, or 7.5 times its earnings per share, and Thompson has one million shares outstanding selling at R15, or five times its earnings per share wie