QUESTION THREE As a student of Finance, on internship in value zone values, you have been tasked to estimate the value of Savvy Ltd, a division of Confront, which is being considered value for sale. The schedule for depreciation, Income, Non-current Assets and working capital items is as presented below Working capital items 2013(Active) 2014 (Forecasted) Sh Millions Sh Million Cash and cash equivalents 15 20 Accounts Receivables 20 15 Inventory 35 50 Trade and payable 10 15 Accruals 5 5 Short Notes payable 5 15 Net working capital 50 50 Depreciation and Amortization Depreciation 40 45 Amortization 10 15 Non-current Assets Machinery cost 200 300 Equipment (cost) 100 130 Acc. Depreciation (Machinery) 100 105 Acc. Depreciation (Equipment) 35 85 NET CURRENT ASSETS 165 240 Income schedule 2013(Active) 2014 (Forecasted) Sh Millions Sh Million Revenue 350 500 Cost of sale (100) (200) 250 300 Other operating expenses (30) (20) 220 280 Depreciation and Amortization 50 60 Interest expenses 10 15 Earnings before Tax 160 205 Tax (48) (61.5) Earnings after tax 112 143.5 FINANCE SCHEDULE Ordinary share capital 90 90 Retained Earnings 75 130 Retained Earnings 50 70 12% Debt 215 290 Additional information 1. The average beta of firms computing with Savvy Ltd is 1.15. While Ken front Ltd has debt ratio (D/D+E) of about 50 percent, Savvy division can sustain in debit ration of only 20 percent which is similar to debt ratio of competitors. At this level of debt, Savvy can expect to pay 8 percent on its debt, before taxes. The average return on Market estimated at 13 percent and the Treasury bond rate is 7 percent 2. After the year 2014, investment in working capital and fixed capital is expected to grow at an annual rate of 5 percent for ten years. Depreciation and Amortization is also expected to grow at the same rate as fixed capital investment and will offset each other at stead state. After the ten year growth, working capital investment growth is expected to be 3 percent forever. This represents the steady state. 3. Earnings before interests and tax are expected to grow as the working capital investment growth pattern. REQUIRED i) Estimate the cost of capital of Savvy, the division of Ken front Limited (10marks) ii) Estimate the free cash flow to the division for the period 2014 clearly indicating

assumptions made (10 marks) iii) Estimate the terminal values of the free cash flow to the of division at year 2024 ( 5 marks) iv) Determine the value of the division (5 marks).