Question $335$ Marks

Your company has appointed you to estimate its value under alternative assumptions about the company$$s performance.

Required:

$3\mathrm{.}1.$ Using the discounted cash flow $($DCF$)$ approach to valuation and the following assumptions, provide an estimate of your company$$s value. $[20]$

$$ Use the financial information of the company of your choice to estimate the current sales. The sales are expected to grow at a rate of $5$ percent per year for the next four years, and then at $3$ percent per year forever

$$ The pre$-$tax operating margin ratio to sales will be $15$ percent for the next four years and then stabilize at $20$ percent forever

$$ The working capital requirement to sales ratio from year $1$ onwards will remain at $18$ percent forever

$$ The company has R$500$ million of debt outstanding. It can borrow at $6$ percent

$$ The company$$s income tax rate is $40$ percent

$$ Its beta is $1\mathrm{.}05.$ The risk$-$free rate and the market risk premium are $5$ percent

$$ The debt$-$to$-$total$-$capital ratio of the company, at market value, is $50$ percent

In your valuation, you are expected to make additional assumptions relevant for your company or industry $($for some of the information not provided above$).$

$3\mathrm{.}2.$ Use your finding in part $3\mathrm{.}1$ along with the data provided, to determine the company$$s ordinary share value. $[2]$

$3\mathrm{.}3.$ Based on the number of shares the company plans to issue, what is the estimated value per share? $[2]$

$3\mathrm{.}4.$ Assess if the value per share is acceptable to the market. $[3]$

$3\mathrm{.}5.$ The sustainability of the performance of your company for next four years is dependent on how business and financial risks are managed. Evaluate the business and financial risks for your company. $[8]$