Question 6.31 Worldwide Logistics (Pty) Ltd's financial director has produced the following projected profit and loss statements for the years 207 to 2010. The company's year-end is 30 June. The company is expecting a significant increase in revenue in 207, but thereafter the company is expecting to experience a fall in sales growth in each year. The growth rate expected to be achieved in 2010 is projected to be the sustainable growth rate that the company will be able to achieve each year after 2010. This is a nominal growth rate. Statements of Comprehensive Income for the year ended 30 June Turnover Operating costs before depreciation EBITDA Depreciation EBIT Net interest payable Profit before tax Tax Profit after tax Retained eamings at beginning of year Dividends Retained eamings at end of year The projected summarised Statements of Financial Position are set out below. The company has estimated that R200 million in cash balances at the end of June 206 is surplus to the company's needs and the company will use this to reduce its financing requirements in 207. The company has estimated that operating cash will amount to 1% of sales revenue from 207 onwards. The company's provisions relate to the company's ongoing operations. The reduction in ordinary share capital in 209 reflects the effect of a projected share buy-back. The company is also planning to reduce its long-term borrowings by R400 million at the end of 209. 654 FINANCIAL MANAGEMENT The company has a loan covenant that the debt-equity ratio will not exceed 80%. Investments represent non-interest bearing strategic assets which support the company's normal operations. The interest rate on long-term borrowings is a fixed rate of 10% until 2010. Thereafter the interest rate becomes a variable market related interest rate. The current market rate on similar long-term borrowings is 11%. The interest rate on short-term loans and overdrafts is a variable rate. The growth rate in revenue for 2010 is expected to be sustainable into the future. The current date is 1 July 206. Interest for any year is based on the opening balances of short-term debt and long-term debt. The corporate tax rate is 28% and the company's weighted-average cost of capital is estimated to be 12%. Required 1. Set out the operating Free Cash Flows of the company over the next 4 years and use these to value the ordinary shares of the company. You should ensure that you include a terminal or continuing value in your calculation of the value of the company's ordinary shares 2. Set out the financing cash flows of the company in a separate schedule. 3. Comparable firms are currently trading on a price-earnings ratio of 9 . Compare this to the company's current P/E ratio. Set out the advantages and disadvantages of using earning based valuation method in relation to using a DCF (free cash flow) valuation method. 4. Use financial analysis and some key ratios to highlight potential problems for the compa over the next few years. The key ratios should be the debt-equity ratio, interest cover, t current ratio, the asset turnover ratio, return on capital employed and the EBIT to Sal ratio. What recommendations would you make in relation to the company's operations at 2/3 financing decisions? Question 6.31 Worldwide Logistics (Pty) Ltd's financial director has produced the following projected profit and loss statements for the years 207 to 2010. The company's year-end is 30 June. The company is expecting a significant increase in revenue in 207, but thereafter the company is expecting to experience a fall in sales growth in each year. The growth rate expected to be achieved in 2010 is projected to be the sustainable growth rate that the company will be able to achieve each year after 2010. This is a nominal growth rate. Statements of Comprehensive Income for the year ended 30 June Turnover Operating costs before depreciation EBITDA Depreciation EBIT Net interest payable Profit before tax Tax Profit after tax Retained eamings at beginning of year Dividends Retained eamings at end of year The projected summarised Statements of Financial Position are set out below. The company has estimated that R200 million in cash balances at the end of June 206 is surplus to the company's needs and the company will use this to reduce its financing requirements in 207. The company has estimated that operating cash will amount to 1% of sales revenue from 207 onwards. The company's provisions relate to the company's ongoing operations. The reduction in ordinary share capital in 209 reflects the effect of a projected share buy-back. The company is also planning to reduce its long-term borrowings by R400 million at the end of 209. 654 FINANCIAL MANAGEMENT The company has a loan covenant that the debt-equity ratio will not exceed 80%. Investments represent non-interest bearing strategic assets which support the company's normal operations. The interest rate on long-term borrowings is a fixed rate of 10% until 2010. Thereafter the interest rate becomes a variable market related interest rate. The current market rate on similar long-term borrowings is 11%. The interest rate on short-term loans and overdrafts is a variable rate. The growth rate in revenue for 2010 is expected to be sustainable into the future. The current date is 1 July 206. Interest for any year is based on the opening balances of short-term debt and long-term debt. The corporate tax rate is 28% and the company's weighted-average cost of capital is estimated to be 12%. Required 1. Set out the operating Free Cash Flows of the company over the next 4 years and use these to value the ordinary shares of the company. You should ensure that you include a terminal or continuing value in your calculation of the value of the company's ordinary shares 2. Set out the financing cash flows of the company in a separate schedule. 3. Comparable firms are currently trading on a price-earnings ratio of 9 . Compare this to the company's current P/E ratio. Set out the advantages and disadvantages of using earning based valuation method in relation to using a DCF (free cash flow) valuation method. 4. Use financial analysis and some key ratios to highlight potential problems for the compa over the next few years. The key ratios should be the debt-equity ratio, interest cover, t current ratio, the asset turnover ratio, return on capital employed and the EBIT to Sal ratio. What recommendations would you make in relation to the company's operations at 2/3 financing decisions