QUESTION THREE

Faiba Technologies is a private firm owned by John & Sons. In the most recent financial period, the firm recorded revenues of sh. 10 million on which it made earnings before interest and taxes of 1.5 million.

The firm had debt outstanding of sh. 4 million, on which pre-tax interests expenses amounted to sh. 0.4 million. The value of equity in the firms books is indicated as 4 million. The average beta of a publicity traded firms that rate in the same business is 1.5 million and the average debt-equity ratio is 0.3 based upon market value of equity.

The market value of equity of this firm is, on average two times the book value of equity. All firms face a 30% tax rate.

Furthermore, capital expenditure amounted to sh. 2 million in the most recent year and were twice the depreciation charge in that year. Both items are expected to grow at the same rate as revenues for the next five years and 10 percent after that.

The revenues of the firm are expected to grow 20 percent year for the next five years, and 5 percent after that. Net income and earnings before interest and tax is expected to increase 30 percent a year for the next five years and 10 percent after that.

The Treasury bond rate is 7% and the average return on the NSE-ASI index is 13 percent.

Required

1. Estimate the cost of equity for this private firm
2. Estimate the cost of capital for this private firm
3. Estimate the value of Faiba technologies using the firms approach