Question one

As a student of DFI $515,$ assume that you are analyzing the financial statements of a Kenya

limited$,$ company in the manufacturing sector. Assume that you are in a team that is attempting to

estimate the intrinsic value of the company. Presented below are the summarized statement of

financial position and income statement for $2022($actual$)$ and $2023($forecasted$).$

STATEMENT OF FINANCIAL POSITION$-$Kenya limited

$2024$ Forecast $2023$ Actual

Sh$$millions Shs$$millions

Cash $75$

Investment in Marketable

securities

$85$

Accounts receivable $1015$

Inventory $4030$

Current assets $6555$

Property, plant, and

Equipment

$430300$

Accumulated depreciation $(185)(135)$

$245165$

TOTALASSETS $310220$

Trade payable $1530$

Accruals $44$

Short$-$term debt $($Interest

bearing$)$

$2510$

Current liabilities $4444$

$10\%$ long$-$term debt $13095$

Ordinary share capital $5050$

Retained earnings $8631$

Total capital & long$-$term

debt

$266176$

Total liabilities & owner$$s

equity

$310220$

INCOME STATEMENT $-$KENYA LIMITED

$2024$ Forecast $2023$ Actual

Shs$$ millions Shs$$ millions

Revenue $450350$

Cost of sales $200100$

Gross profit $250250$

Other operating expenses $3030$

Depreciation $5040$

Interest expense $2010$

$10080$

Pre$-$tax earnings $150170$

Taxes $4551$

Net Income $105119$

Required:

Calculate expected free cash flow to equity holders for the period $2024$ based on;

i$).$ Net income

ii$).$ Earnings Before Interest and Tax

Question two

ABC limited is a private company located in Nairobi County. The company manufactures and

sells various products. You have been tasked with the assignment of valuing the private firm

using discounted cash flow approach. You have been provided with the following information

for the company and that of ten similar firms in the industry. i$).$ Data for ABC limited for the most recent period

YEAR $2023$

Revenues Sh$.30$ million

Earnings before interest and tax Sh$.10$ million

Capital expenditure Sh$.4$ million

Working capital investment Sh$.2$ million

Depreciation Sh$.2$ million

ii$).$ Corporate tax rate relevant for ABC limited is $25\%.$ The before tax cost of debt of ABC

limited is $10\%.$

iii$).$ Extracts from the statement of financial position of ABC limited is as shown below

YEAR $2023$

Ordinary share capital $($sh$.1\mathrm{.}5$ par value$)$ Sh$.375$ million

Borrowings Sh$.150$ million

iv$).$ The average beta of ten comparable companies in the same industry as ABC is $1\mathrm{.}5$ based on

market value of debt and equity. v$).$ On average, market value of equity is twice the book value whereas market value of debt

equals to the book value.

vi$).$ The average debt equity ratio of the industry is $0\mathrm{.}45$

vii$).$ Average return on market and risk$-$free rate of return is $8\%$ and $5\%$ respectively. Additional information:

The firm expects revenues, earnings before interest and taxes, capital expenditure, investment in

working capital and depreciation to grow at an annual rate of $6\%$ each year for $20$ years. After

the twenty$-$year growth period the growth in revenues, earnings before interest and taxes and

investment in working capital will decline to stable $3\%$ each year into the foreseeable future.

During the steady state period, capital expenditure and non$-$cash charges will off$-$set each other. Required:

a$).$ Briefly discuss the treatment of illiquidity discount in the valuation of a private company

b$).$ Discuss the three challenges when computing beta of a private company

c$).$ Compute weighted average cost of capital for the private company

Question three

a$).$ Identify and discuss the various approaches that are used in the valuation of business entities

b$).$ Discuss the importance of economic and strategic analysis when undertaking valuation

exercise

c$).$ Briefly explain four factors that determine the value of an asset or a firm

Question $4$

a$).$ Forecasting financial statements is one of the stages in the valuation process. Briefly discuss

how free cash flow can be projected in a valuation exercise

b$).$ XYZ ltd is a software company located in Nairobi Kenya. The following information is

provided for the most recent accounting period.

Sales Sh$.60$ million

Earnings Before Interest and Tax Sh$.30$ million

Capital expenditure Sh$.10$ million

Working capital investment Sh$.3$ million

Depreciation Sh$.5$ million

Additional information

i$).$ The first expert earnings before interest and taxes, investment in property, plant and

equipment, investment in working capital, Amortization and depreciation and sales to grow at an

annual rate of $10\%$ each year for $5$ years. After the five$-$year growth period the growth in sales,

earnings before interest and taxes, and working capital investment will decline to stable $5\%$ per

year, and investment in property, plant and equipment and amortization and depreciation will

offset each other. ii$).$ The company has an effective tax rate of $30\%$

iii$).$ The estimated weighted average cost of capital is $14$ percent

Required:

Estimate the value of operations of XYZ ltd