QUESTION 4 (20 marks)

SatNet Ltd is a company listed on the Johannesburg Stock Exchange (JSE). SatNet Ltd is considering making a bid for Qlink Ltd. Qlink Ltds stock is also listed and principally traded on the JSE.

The following information should be used to value Qlink Ltd. Statement of profit or loss for the most recent accounting period (2022)	R million
Revenue	200
Cost of sales	(80)
Gross profit	120
Operating expenses (including depreciation of R 6 million)	(24)
Profit from operations	96
Finance costs	(7)
Profit before tax	89
Taxation	(24)
Profit after tax	65

Additional information:

Selling prices are expected to rise at 10% per year for the next 3 years and then stay constant thereafter.

Sales volumes are expected to rise at 5% per year for the next 3 years and then stay constant thereafter.

Assume that cost of sales is a completely variable cost, and that other operating expenses (including depreciation) are expected to stay constant.

Qlink Ltd invested R 10 million in non-current assets and R 2 million in working capital last year. The non-current assets annual amounts are expected to stay constant in the future. The working capital annual amounts are expected to increase by 25% in the first year and then stay constant in the future.

Qlink Ltds finance costs are expected to increase by R 1 million in both the first and second years respectively and then stay constant in the future.

The marginal tax rate is 27%, payable in the year in which the liability arises.

Assume that book depreciation equals tax depreciation.

Qlink Ltd has 100 million shares in issue.

Qlink Ltds cost of equity is 14%.

Required:

4.1 Calculate the value of the equity in Qlink Ltd (in total and per share) by forecasting future cash flows to equity and discounting them to present value using the cost of equity. (20 marks)

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