Questions #3

ABC Company's CFO has provided a long-term forecast for ABC as follows:

EBITNet IncomeDiscount Factor

2020$42,000,000$20,000,0000.91

2021$44,000,000$21,000,0000.83

2022$46,000,000$22,000,0000.75

2023$48,000,000$23,000,0000.68

2024$50,000,000$24,000,0000.62

Assumptions:

The growth rate after 2024 is 3%

XYZ Company uses a 10% weighted average cost of capital (WACC) and a minimum required return on equity of 13.33%

The tax rate is 50%

The company pays $2,000,000 a year in interest for all years

Depreciation is expected to be $5,000,000 per year

oAfter 2020, new equipment purchases are expected to be $10,000,000 a year

oAfter 2020, net cash outflow of these two items is ($5,000,000) a year

oSee expenditures for 2020 above which is a one-time modernization year

Net working capital changes are assumed to be ($1,000,000) a year as sales grow

The terminal value of the company at the end of 2024 is $280,000,000

The purchase will take place at thebeginning of 2020, if accepted