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 ton similar firms in the industry. (i) Data for ABC limited for the most recent period Revenues Earnings Before Interest and Tax Capital Expenditure Working Capital Investment Depreciation Cash and Cash Equivalents YEAR 2018 Sh. 200 Million Sh. 100 Million Sh. 100 Million Sh. 10 Million Sh. 50 Million Sh. 5 Million (ii) Corporate tax rate relevant for ABC limited is 30 %. The before tax cost of debt of ABC Itd. is 10% (iii) Extracts from the statement of financial position of ABC limited is as shown below YEAR 2018 Ordinary Share Capital (Sh. 1.5 Par value) Borrowings Sh. 75 Million (iv) The average beta of ten comparable companies in the same industry as ABC limited is 1.7 based on market value of debt and equity. On average, market value of equity is twice the book value whereas market value of debt equals to the book value. (v) The average debt equity ratio of the ten comparable companies industry) is 0.25 (vi) Average return on market and risk free rate of return is 12 % and 7 % respectively. Additional information: The company 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, Capital Expenditure, Investment in Working Capital will decline to stable 2 percent per year, and capital expenditure and Depreciation will offset each other. Required: (a) Compute Free cash flow to ABC limited for year 2018 (b) Compute after tax cost of debt (c) Compute cost of equity (levered) for the firm (d) Compute weighted average cost of Capital (e) Compute free cash flow to ABC limited for year twenty one from today (1) Compute Terminal value for ABC limited (g) Compute the fundamental value of ABC limited (5 Marks) (5 Marks) (10 Marks) (5 Marks) (5 Marks) (5 Marks) (10 Marks)