Question 2 (20 marks)

ABC Corporation, a company that is involved in multiple construction projects all over Africa, reported EBITDA of 1290 million in 2023, prior to interest expenses of 215 million and depreciation charges of 400 million. Capital Expenditures in 2023 amounted to 450 million, and working capital was 7% of revenues (which were 13,500 million). The firm had debt outstanding of 3.068 billion (in book value terms), trading at a market value of 3.2 billion, and yielding a pre-tax interest rate of 10%. There were 62 million shares outstanding, trading at 64 per share, and the most recent beta is 1.10. The tax rate for the firm is 28%. (The Government bond rate is 7.5% and the market risk premium is 7%.) The firm expects revenues, earnings, capital expenditures and depreciation to grow at 9.5% a year from 2024 to 2028, after which the growth rate is expected to drop to 4%. (Capital spending will offset depreciation in the steady state period.) The company also plans to lower its debt/equity ratio to 50% for the steady state (which will result in the pre-tax interest rate dropping to 9%.)

a) Estimate the cost of capital for the forecast horizon and the steady state period. (8 marks)

b) Estimate the value of the firm. (8 marks) c)Estimate the value of the equity in the firm and the value per share. (4 marks)