Q.3 The following table shows four-year forecast for ABC Limited.

Year 2017 2018 2019 2020

Free Cash Flow (shs Millions) 5.2 7.6 9.2 11.2

Assume that after year 2020,earnings before interest and tax will remain constant at shs 20 million,depreciation will equal capital expenditure in each year and working capital will not change .ABC's weighted Average cost of capital is ten percent and its tax rate is 30 percent.

Required:

(i) Estimate the fair market value of ABC Limited at the end of year 2016. 5 marks.

(ii) Assume that ABC Limited has four million shares outstanding and the market value of its interest bearing liabilities on the valuation date equal to shs 25,000,000 .Estimate the fair market value per share of ABC'S equity at the end of 2016.

(iii) For ABC Limited ,Assume that

(a) Free cash flows in years 2017 through 2020 remain as stated in the table.

(b) Earnings before interest and Tax in year 2020 is sh 20,000,000 and then it grows at five percent per year forever.

(c)Capital expenditure in year 2021 exceeds depreciation by three million shillings grows at five percent per year forever.

(d) working capital investments are shs 1,500,000 in 2021 and this amount grows five percent per year forever.

Required:

Estimate the fair market value of ABC'S Equity per share at the end of year 2016 .Assuming value of debt is shs 25,000,000