Question
Q No 2: As an analyst in the valuation team your job is to perform significant financial modeling and analysis. Your company is seeing a
Q No 2: As an analyst in the valuation team your job is to perform significant financial modeling and analysis. Your company is seeing a new sales strategy that require your input. The strategy will be effective for the upcoming 4 Years. If the company adopts the new strategy, sales will grow at the rate of 15% per year for three years. Other ratios such as: Asset turnover, gross margin, the capital structure and income tax will remain unchanged. However, depreciation would be applicable at 8% of net fixed assets at the starting of the year. Moreover, the target rate of return for the company is 12%. Additional financial information for current year is mentioned below:
Income Statement | |
Sales | 50,000 |
Gross Margin (15%) | 7,500 |
Admin., selling and Distribution expenses (7%) | 3,500 |
Profit before tax | 10,000 |
Tax (35%) | 3,500 |
Profit After Taxes | 6,500 |
Balance Sheet | |
Fixed Assets | 17,000 |
Current Assets | 12,000 |
Equity | 25,000 |
- Determine value of business before adoption of new strategy? (2 Marks)
- What will be the incremental value and value of business after adoption of this new strategy? (5 Marks)
- Provide detailed comments should the company proceeds with this new strategy or Not? (3 Marks)
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