Question:

a)List and Discuss three challenges you are likely to experience in undertaking valuation of a private firm (10 Marks)

b) Mlolongo Enterprises is a private firm owned by Mr.Mlolongo.The firms owner has asked you to estimate the value of the company as part of strategic requirements.

You have been provided with the following data for most recent accounting period.

ITEM Amount (sh.Million)

Revenues 20

Debt(Outstanding) 10

EBIT 2

Interest Expense(Pre-TAx) 1

Equity (Book Value) 10

Capital Expenditure 1

Depreciation 0.5

Additional information:

i) The beta of a publicly traded firm that are in the same business as Mlolongo Enterprise is 1.4

ii) Average debt -Equity ratio of bublicly traded firms in (i) above is 0.2 and it is based on market value of Equity

iii)MArket value of Equity of publicly traded firms on average is three (3) times the book value of Equity

iv) All firms face a 30% tax rate

v)Capital expenditure and depreciation are expected to grow at the same rate as revenue for the next ten years and to offset each other in the steady state

vi)Revenues of this firm are expected to grow at an annual rate of 20%for the next ten years and at 5% there after forever

vii)Earnings before interest and Tax (EBIT) are expected to grow as revenues

viii) Treasury bond rate is estimated as seven percent whereas the average return in the market is assumed to be 12%

ix)Working capital investment is negligible

Required:

a) Estimate the cost of Equity for Mlolongo Enterprises

b) Estimate the Value of Mlolongo ltd