QUESTION ONE: T'he following is a presentation of re-organized financial statements of Logam limited for the most recent period (year 2018). The figures are in million Kenya shillings. Income Statement Amount Amount Revenues 500 Operating Expenses (100) 400 Depreciation Interest expenses Pre-tax earnings Taxes Net Income 10 20 (30) 370 (11) 259 Page 1 of 4 Statement of financial position Amount Amount 300 ASSETS Property, plant and equipment (nict) Current Assets 100 400 LIABILITIES AND EQUITY Current Liabilities Long-term liabilities Ordinary share capital Retained Earnings Total Liabilities and Equity 65 100 200 35 235 400 Additional Information 1. The composition of Current Assets is a follows: Cash and cash equivalent Inventory Accounts Receivable Amount 20 30 50 100 2. Composition of current liabilities is as follows:- Amount Accruals Trade payable Short-term loan 5 50 10 65 3. The firms revenues are expected to grow (based on company estimates) at an annual rate of 20% each year for five years and 5% thereafter forever. 4. Operating current asset and spontaneous' current liabilities are also expected to grow as revenues. 5. Property, plant and equipment expected to grow as revenues for the first five years but to off- set cach other with depreciation and amortization during the stable (steady) growth period. Amount Accruals Trade payable Short-term loan 50 10 65 3. The firms revenues are expected to grow (based on company estimates) at an annual rate of 20% each year for five years and 5% thereafter forever. 4. Operating current asset and spontaneous' current liabilities are also expected to grow as revenues 5. Property, plant and equipment expected to grow as revenues for the first five years but to off- set cach other with depreciation and amortization during the stable (steady) growth period. Page 2 of 4 6. Income statement items are expected to grow as revenues except depreciation which has a direct proportional relationship as property, plant and equipment 7. Logam Limited has settled on a debt-equity ration of 20% The relationship between this ratio and pre-tax cost of debt is as follows:- Debt-equity Ratio 20% Pre-tax cost of debt 10% Based on the historical data, the beta of Logam limited given debt-equity ratio of 20% is 1.5. 8. The average return on the NSE -20 share index is 12% whereas long-term government securities yield 7%. Required: (a) Based on the information provided, project the income statement and statement of financial (5 marks) position for year 2019 (b) Based on projections in (a) above, compute: i) Investment in working capital for Year 2019 ii) Investment in Fixed Capital for Year 2019 iii) Earnings Before Interest and tax for Year 2019 iv) Non-cash charges for Year 2019. (12 marks) (c) Compute the free cash flow for the projected period (2019, 2020, 2021, 2022 and 2023) (10 marks) (d) Compute the after tax cost of debt for Logam Limited given what the firm considers appropriate debt-equity ratio. (5 marks) (e) Compute the cost of equity for the company using the capital asset pricing model. (3 marks) (1) Compute the firm's weighted average cost of capital (5 marks) (g) Estimate the terminal value of Logam enterprises. (5 marks) (h) Using the discounted cash flow approach, estimate the value of operation for Logam Limited. (10 marks) [Total 55 marks) QUESTION ONE: T'he following is a presentation of re-organized financial statements of Logam limited for the most recent period (year 2018). The figures are in million Kenya shillings. Income Statement Amount Amount Revenues 500 Operating Expenses (100) 400 Depreciation Interest expenses Pre-tax earnings Taxes Net Income 10 20 (30) 370 (11) 259 Page 1 of 4 Statement of financial position Amount Amount 300 ASSETS Property, plant and equipment (nict) Current Assets 100 400 LIABILITIES AND EQUITY Current Liabilities Long-term liabilities Ordinary share capital Retained Earnings Total Liabilities and Equity 65 100 200 35 235 400 Additional Information 1. The composition of Current Assets is a follows: Cash and cash equivalent Inventory Accounts Receivable Amount 20 30 50 100 2. Composition of current liabilities is as follows:- Amount Accruals Trade payable Short-term loan 5 50 10 65 3. The firms revenues are expected to grow (based on company estimates) at an annual rate of 20% each year for five years and 5% thereafter forever. 4. Operating current asset and spontaneous' current liabilities are also expected to grow as revenues. 5. Property, plant and equipment expected to grow as revenues for the first five years but to off- set cach other with depreciation and amortization during the stable (steady) growth period. Amount Accruals Trade payable Short-term loan 50 10 65 3. The firms revenues are expected to grow (based on company estimates) at an annual rate of 20% each year for five years and 5% thereafter forever. 4. Operating current asset and spontaneous' current liabilities are also expected to grow as revenues 5. Property, plant and equipment expected to grow as revenues for the first five years but to off- set cach other with depreciation and amortization during the stable (steady) growth period. Page 2 of 4 6. Income statement items are expected to grow as revenues except depreciation which has a direct proportional relationship as property, plant and equipment 7. Logam Limited has settled on a debt-equity ration of 20% The relationship between this ratio and pre-tax cost of debt is as follows:- Debt-equity Ratio 20% Pre-tax cost of debt 10% Based on the historical data, the beta of Logam limited given debt-equity ratio of 20% is 1.5. 8. The average return on the NSE -20 share index is 12% whereas long-term government securities yield 7%. Required: (a) Based on the information provided, project the income statement and statement of financial (5 marks) position for year 2019 (b) Based on projections in (a) above, compute: i) Investment in working capital for Year 2019 ii) Investment in Fixed Capital for Year 2019 iii) Earnings Before Interest and tax for Year 2019 iv) Non-cash charges for Year 2019. (12 marks) (c) Compute the free cash flow for the projected period (2019, 2020, 2021, 2022 and 2023) (10 marks) (d) Compute the after tax cost of debt for Logam Limited given what the firm considers appropriate debt-equity ratio. (5 marks) (e) Compute the cost of equity for the company using the capital asset pricing model. (3 marks) (1) Compute the firm's weighted average cost of capital (5 marks) (g) Estimate the terminal value of Logam enterprises. (5 marks) (h) Using the discounted cash flow approach, estimate the value of operation for Logam Limited. (10 marks) [Total 55 marks)