REQUIRED: Calculate the value of a 60% ordinary shareholding in Bugs Boutique as at 30 April 20X7 using the free cash flow to the firm valuation model. All workings must be shown.

Bugs' Boutique (Pty) Ltd has 30 April as its financial year-end. Provocative Fashions Ltd is a company listed on the JSE and is interested in acquiring a 60% interest in Bugs' Boutique. The latest financial statements of Bugs' Boutique are for the year-ended 30 April 20X7. The following information relating to Bugs' Boutique is provided: 1. The sales revenue for the year-ended 30 April 20X7 amounted to R1 000 million. Sales revenue is expected to grow by 30% during the 20X8 financial year and by 25% in 20X9. 2. The management of Bugs' Boutique uses a technique called "percentage of sales" when performing projections. During the financial year-ended 30 April 20X7, Bugs' Boutique achieved an operating profit margin of 40% (based on operating profit after deducting depreciation but before interest and tax and non-operating income). It is expected that the company will maintain this operating profit margin into the future. 3. On 30 April 20X7, the total investment in net working capital of Bugs' Boutique was equal to 20% of sales revenue. It is expected that at the end of each subsequent year, the total net investment in working capital will be equal to 20% of sales revenue. 4. It is estimated that after the explicit forecast period (20X8 to 20X9), free cash flows to the firm will grow at a constant rate of 6% per year. 5. The following projections were made with regard to capital expenditure: Projected Actual Projected 20X7 20x8 20X9 Rm Rm Rm 465.0 487.0 507.0 Opening carrying amounts (NBV) Additions 80.0 100.0 120.0 Depreciation* (58.0) (80.0) (90.0) Closing carrying amounts (NBV) 487.0 507.0 537.0 *Depreciation expense is considered to be equal to the tax (wear and tear) allowances. The following information is also provided as at 30 April 20X7: Bugs' Boutique Market/Sector Beta 1.8 1.6 Ordinary shares in issue (millions) 500 Interest rate on the R157 (government bond) 8.5% Market rate of return 12.5% Coupon rate on debentures issued by the company 10% Weighted average cost of capital (WACC) 14% Debentures at par value (million Rands) 400 7. On 30 April 20X7, the debentures of Bugs' Boutique had a market value of R380m. 8. On 30 April 20X7, the non-operating assets of Bugs' Boutique had a carrying amount of R80m and a fair value of R100m. 9. The applicable income tax rate for companies is 28%. 6. Bugs' Boutique (Pty) Ltd has 30 April as its financial year-end. Provocative Fashions Ltd is a company listed on the JSE and is interested in acquiring a 60% interest in Bugs' Boutique. The latest financial statements of Bugs' Boutique are for the year-ended 30 April 20X7. The following information relating to Bugs' Boutique is provided: 1. The sales revenue for the year-ended 30 April 20X7 amounted to R1 000 million. Sales revenue is expected to grow by 30% during the 20X8 financial year and by 25% in 20X9. 2. The management of Bugs' Boutique uses a technique called "percentage of sales" when performing projections. During the financial year-ended 30 April 20X7, Bugs' Boutique achieved an operating profit margin of 40% (based on operating profit after deducting depreciation but before interest and tax and non-operating income). It is expected that the company will maintain this operating profit margin into the future. 3. On 30 April 20X7, the total investment in net working capital of Bugs' Boutique was equal to 20% of sales revenue. It is expected that at the end of each subsequent year, the total net investment in working capital will be equal to 20% of sales revenue. 4. It is estimated that after the explicit forecast period (20X8 to 20X9), free cash flows to the firm will grow at a constant rate of 6% per year. 5. The following projections were made with regard to capital expenditure: Projected Actual Projected 20X7 20x8 20X9 Rm Rm Rm 465.0 487.0 507.0 Opening carrying amounts (NBV) Additions 80.0 100.0 120.0 Depreciation* (58.0) (80.0) (90.0) Closing carrying amounts (NBV) 487.0 507.0 537.0 *Depreciation expense is considered to be equal to the tax (wear and tear) allowances. The following information is also provided as at 30 April 20X7: Bugs' Boutique Market/Sector Beta 1.8 1.6 Ordinary shares in issue (millions) 500 Interest rate on the R157 (government bond) 8.5% Market rate of return 12.5% Coupon rate on debentures issued by the company 10% Weighted average cost of capital (WACC) 14% Debentures at par value (million Rands) 400 7. On 30 April 20X7, the debentures of Bugs' Boutique had a market value of R380m. 8. On 30 April 20X7, the non-operating assets of Bugs' Boutique had a carrying amount of R80m and a fair value of R100m. 9. The applicable income tax rate for companies is 28%. 6