Question
Najarian Inc. is an established communications technology firm created by a consolidation with a competitor arranged by Blue Light Capital- a hedge fund specializing in
Najarian Inc. is an established communications technology firm created by a consolidation with a competitor arranged by Blue Light Capital- a hedge fund specializing in such transactions. The firm is known for its interests in artificial intelligence (AI)/augmented reality (AR) and is based in Round Rock, Texas. Due to being recognized as an industry leading competitor, the company concentrates its efforts on producing its market leading product Ziromax which has the added benefit of allowing the company to maintain its focus without distraction.
At this point Mega Market Trends Inc. (technology consulting firm) estimates that unit sales for the next five years will likely be 491,482, 482,663, 414,221, 389,443, and 309,603 units respectively provided the firm adheres to an average selling price per unit of $286.04 for the next two years and $209.33 in the following three years. Thereafter, growth in unit sales are expected to be 2.76% indefinitely. The Corporate Finance staff performed an internal audit for which it has determined that the company can produce Ziromax at a variable cost per unit of $142.45 growing at 3.14% per year for the first 5 years and 3.39% per year indefinitely thereafter while overall fixed costs are estimated to be $16,342,875 annually for the first year and grow 2.98% per year indefinitely.
The company feels it needs to expand capacity to meet forecasted unit sales; as such, upfront necessary capital expenditures are projected to be $33,298,250 and due to the nature of the investments that the company makes, an IRS ruling deems depreciation to be based on the seven-year MACRS schedule. In the terminal phase of growth, a final investment strategy is expected to change in favor of maintaining the current AI/AR opportunities. With this, an average annual depreciation charge of $437,500 is expected and will follow a straight-line depreciation method with a 4-year time horizon strategy.
To support sales, the companys investment in working capital is projected to be 11.82% of yearly sales for the first 5 years. The terminal phase is expected to elicit slower growth for which the resulting investment in working capital is projected to slow to a 2.16% annual growth rate thereafter.
The marginal corporate income tax rate is expected to average 22.46% assuming no changes to the marginal corporate income tax rate and the projected annual growth rate of Free Cash Flow (FCF) in the terminal phase is expected to be approximately 2.61% indefinitely. Looking at past numbers on an average basis, the debt-equity ratio has consistently centered around 132% for which Najarians current debt level is $8,256,500 with an average maturity of 6 years and an interest rate on this debt averaging 5.49%. After further analysis, the Treasurer is comfortable using an equity beta of 1.3218 while the risk-free rate of return is given as 2.315% and the market rate of return is 11.35%. Currently there are 1,137,790 shares of common stock outstanding.
You have been hired by Najarian Inc. to determine the following:
Operating Cash Flow for each of the first 5 years and the Terminal Phase
Free Cash Flow for each of the first 5 years and the Terminal Phase
The Asset Beta (Industry Beta) that Najarian can use in its analysis
The appropriate discount rate for Najarian in valuing the firm and hence stock price
The asset value of the firm
The equity value of the firm
The appropriate stock price Najarian
Make recommendations to improve Najarians stock price
Your presentation must be in the form of a single professionally prepared Excel spreadsheet-multiple documents are not allowed! Focus on eye appeal that will create a flowing development throughout so clean it up and label all references. You must NOT have constant number inputs which would destroy cell referencing for future use. Be careful, you will be penalized for any and all cell referencing that is destroyed. Additionally, you are to have separate worksheet tabs for Data Entry, Operating Cash Flow, Free Cash Flow, Asset Beta, Discount Rate, Asset Value, Equity Value, Stock Price, and Recommendations. Do not submit your computer project early as I may come back with additional requirements! Should there be additional requirements-you will need a separate worksheet tab for each and every additional requirement that is assigned! When you are done, properly title and submit your work through Moodle by the deadline which is the start of class on the date shown in the syllabus. If you have any questions, feel free to contact me and good luck with your presentation!
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