Question 4 15 Marks You are currently working as financial manager at Rhino Limited, a distributor of commodities. The directors intend to expand the company and asked you to perform a valuation on Vale Limited ("Vale' hereafter), a private company in the same industry. Vale's 2016 financial year has just come to a close on 30 June 2016 and the following extract is made available to you by management: 2020 N$'000 10 985 2 537 Actual Budgeted 2016 2017 2018 2019 N$'000 N$'000 N$'000 N$'000 Sales 7 505 8 670 9 795 10 306 Net profit after interest and before 1 975 2 121 2 328 tax" Depreciation 146 168 195 Purchase of non-current assets 325 344 368 * Interest included in net profit only includes interest on long-term debt. Working capital levels are on average 25% of sales. 213 398 Vale has a target debt: equity ratio of 20:80. The company's cost of equity is 16.10%. 50 000 debentures with a face value of N$100 each were issued three years ago, at a discount of 10% on face value. Interest on the debentures is 13% per annum. The debentures are redeemable on 30 June 2022 at face value. Similar debentures are trading at a rate of 8% (before tax) in the market. This is the only debt that Vale has. The purchase of non-current assets are necessary to maintain growth in operations of the company. The directors hold the opinion that the company will have a sustainable growth of 7% after 2020. For the purpose of this valuation, depreciation and investment in non-current assets will remain constant at 2020's level for the future. Assume that the tax rate is currently 30% and will remain constant for the foreseeable future. Wear and tear is equal to depreciation for the purpose of this valuation. REQUIRED: Calculate the value of Vale Limited's equity by applying the free cash flow to firm method. Round off all amounts to the nearest N$'000. (15)