Question 03 Sandalanka Ple is a well-established business. In financial terms it has a history with ups and downs corresponding directly with the state of the global economy. Over the past five years, its profits have fallen each year with year 2014 values are standing at: Item Rs. (Mn) Revenue 3.650,00 Operating profit 1,460.00 Interest (294.00) Profit before tax 1,166.00 Tax @ 28% (326.48) Profit after tax 839.52 540Mn Number of share issued EPS Rs. 1.55 However, with economists predicting an upturn in the economy, Sandalanka's management team feel that revenue will increase by 5% per annum up to the year 2016 and by 6% per annum in years 2017 and 2018. The company's operating profit margin is not expected to change till year 2016 even though the sales increased. But after 2016, operating profit would be increased by 4.5% per annum from the preceding year operating profit. Non-cash expenses including tax allowable depreciation of Rs. 275 mn, has been deducted when arriving at operating profit. Non-cash expenses including tax allowable depreciation are expected to increase in line with sales. Company recently spent Rs.455 mn on purchase of non- current assets. The company's management believes that they need to invest significant amount for non-current assets in order to meet the future demand as well as to cope with the competition. As a result, this investment value on non-current assets would have to be increased by 8% per annum until year 2016 and by 9% in years 2017 and 2018. Sandalanka has estimated its overall cost of capital to be approximately 13%, but this assumes it will mainta 4/5 equity ratio at 35:65. The corporate tax rate remains constant (28%). Few major shareholders of the company are not much confident about the future and would like to sell the company as a going concern. After critical discussions in director's and 4 management meetings they decided that if they are to be sold the minimum price they would consider would be the fair value of the shares, plus a 15% premium. Sandalanka's Finance Manager believes the best way to find the fair value of the shares is to discount the forecasted free cash flows (FCF) of the firm, assuming that beyond year 2018 FCF will grow at a rate of 4.5% per annum indefinitely Newlanka Plc is one of the major competitor of Sandalanka Plc. Newlanka Plc is targeting to acquire Sandalanka since few years and till the acquisition attempt is not success. Newlanka has maintained its price earnings (P/E) ratio on the stock market at 13.5. Newlanka Ple's year 2014 figures show a profit after tax of Rs. 1,688.64 mn and it has 500 mn shares in issue. Required, i. As at 1" January 2015, prepare a schedule of Sandalanka Ple's forecast free cash flows for the company. Calculate the fair value of the Sandalanka Ple's equity on a per share basis. ii. Newlanka Ple intends to make an offer to Sandalanka Ple based upon a share for share exchange. Newlanka Ple will exchange one of its shares for every three Sandalanka Ple shares. Assuming that Newlanka Ple can maintain its PE ratio at 13.5, calculate the percentage gain in equity value that will earned by both groups of shareholders? iii. Assume that you are one of the major shareholders of Sandalanka Plc and advice on what factors you should consider before deciding whether to accept or reject the offer made by Newlanka Ple? (September, 2019) Question 03 Sandalanka Ple is a well-established business. In financial terms it has a history with ups and downs corresponding directly with the state of the global economy. Over the past five years, its profits have fallen each year with year 2014 values are standing at: Item Rs. (Mn) Revenue 3.650,00 Operating profit 1,460.00 Interest (294.00) Profit before tax 1,166.00 Tax @ 28% (326.48) Profit after tax 839.52 540Mn Number of share issued EPS Rs. 1.55 However, with economists predicting an upturn in the economy, Sandalanka's management team feel that revenue will increase by 5% per annum up to the year 2016 and by 6% per annum in years 2017 and 2018. The company's operating profit margin is not expected to change till year 2016 even though the sales increased. But after 2016, operating profit would be increased by 4.5% per annum from the preceding year operating profit. Non-cash expenses including tax allowable depreciation of Rs. 275 mn, has been deducted when arriving at operating profit. Non-cash expenses including tax allowable depreciation are expected to increase in line with sales. Company recently spent Rs.455 mn on purchase of non- current assets. The company's management believes that they need to invest significant amount for non-current assets in order to meet the future demand as well as to cope with the competition. As a result, this investment value on non-current assets would have to be increased by 8% per annum until year 2016 and by 9% in years 2017 and 2018. Sandalanka has estimated its overall cost of capital to be approximately 13%, but this assumes it will mainta 4/5 equity ratio at 35:65. The corporate tax rate remains constant (28%). Few major shareholders of the company are not much confident about the future and would like to sell the company as a going concern. After critical discussions in director's and 4 management meetings they decided that if they are to be sold the minimum price they would consider would be the fair value of the shares, plus a 15% premium. Sandalanka's Finance Manager believes the best way to find the fair value of the shares is to discount the forecasted free cash flows (FCF) of the firm, assuming that beyond year 2018 FCF will grow at a rate of 4.5% per annum indefinitely Newlanka Plc is one of the major competitor of Sandalanka Plc. Newlanka Plc is targeting to acquire Sandalanka since few years and till the acquisition attempt is not success. Newlanka has maintained its price earnings (P/E) ratio on the stock market at 13.5. Newlanka Ple's year 2014 figures show a profit after tax of Rs. 1,688.64 mn and it has 500 mn shares in issue. Required, i. As at 1" January 2015, prepare a schedule of Sandalanka Ple's forecast free cash flows for the company. Calculate the fair value of the Sandalanka Ple's equity on a per share basis. ii. Newlanka Ple intends to make an offer to Sandalanka Ple based upon a share for share exchange. Newlanka Ple will exchange one of its shares for every three Sandalanka Ple shares. Assuming that Newlanka Ple can maintain its PE ratio at 13.5, calculate the percentage gain in equity value that will earned by both groups of shareholders? iii. Assume that you are one of the major shareholders of Sandalanka Plc and advice on what factors you should consider before deciding whether to accept or reject the offer made by Newlanka Ple? (September, 2019)