Question 1

Brix Plc. is expected to generate cash (before-tax) of 10m by the end of 2023. The balance sheet at the end of 2022 shows that it has fixed assets of 30m and working capital of 5m.

The firm has 12m of debt outstanding at an interest rate of 4%. Assuming that the book value of debt equals its market value. Based on the CAPM, the company's WACC is 7%.

Depreciation is 10% of the fixed asset base each year. Cash taxes are payable at 22% of net operating profits. The firm can expand at 4.2% per annum in perpetuity while maintaining

returns to scale ("replacement" of assets = "depreciation") if debt also increases at that rate.

REQUIRED:

Calculate the net operating profit after-tax (NOPAT), free cash flows (FCFF) and residual income (RIVF) at firm level, and free cash flows at the equity level (FCFE) at the end of the year

(20 marks)

Calculate the value of the firm by using both FCFF and RIVF, and the value of the equity using the indirect approach

(15 marks)

Calculate the cost of equity capital.

(10 marks)

If the company can grow at the sustainable growth rate of 5%, calculate the dividend payout ratio and the dividends at the end of the year.

(25 marks)

Calculate the value of equity by using the dividend discount model (DDM) and the equity level RIVM

(15 marks)

Apply the dividend payout ratio to calculate the price-to-earnings (P/E) ratio and apply it to value equity.

(10 marks)

Draw a conclusion from the above answers on the value of equity.

(5 marks)

[Total 100 marks]