Section 2 (25 Marks) - The information below relates to questions 1-3. Complete the calculation made. 10% 15% 8% 77% AFC Ltd Sales growth Current assets/Sales Current liabilities/Sales Net fixed assets/Sales Costs of goods sold/Sales Depreciation rate Interest rate on debt Interest paid on cash and marketable securities Tax rate Dividend payout ratio 70% 10% 5% 4% 30% 40% 0 1 2 3 4 5 1000 1100 1210 1331 1464 1611 -700 -770 -847 -932 -1025-1127 300 330 363 399 439 483 -16 -16 -16 -16 -16 -16 3 3 3 3 3 3 Year Income statement Sales Costs of goods sold EBITDA Interest payments on debt Interest earned on cash and marketable securities Depreciation Profit before tax Taxes Profit after tax Dividends Retained earnings -100 -107 -125 - 146 -170 -198 187 210 225 240 256 273 -56 -63 -68 -72 -77 -82 131 147 158 168 179 191 -52 -59 -63-67 -72 -76 79 88 95 101 108 114 73 80 84 86 86 82 150 165 182 200 220 242 Balance sheet Cash and marketable securities Current assets Fixed assets At cost Depreciation Net fixed assets Total assets 1070 1254 1464 1704 1977 2287 -300 -407 -532 -679 -849 -1047 770 847 932 1025 1127 1240 1000 1096 1200 1310 1429 1555 80 88 97 106 117 129 Current liabilities Debt 320 320 320 320 320 320 Stock 450 450 450 450 450 450 150 238 333 434 541 656 Accumulated retained earnings Total liabilities and equity 1000 1096 1200 1310 1429 1555 Year 0 1 2 3 4 5 191 147 158 168 179 107 125 146 170 198 - 15 - 17 - 18 -20 -22 11 12 8 9 10 -184 -210 -240-273 -310 11 11 11 11 11 Free cash flow calculation Profit after tax Add back depreciation Subtract increase in current assets Add back increase in current liabilities Subtract increase in fixed assets at cost Add back after-tax interest on debt Subtract after-tax interest on cash and mkt. securities Free cash flow Valuing the firm Weighted average cost of capital Long-term free cash flow growth rate Number of Shares -2 -2 -2 -2 -2 72 74 75 76 77 12% 5% 1000 Q1. (9 Marks) Using the information supplied calculate: 1. Enterprise Value 2. Equity Value 3. Price per share If the current share price is $0.55 per share what recommendation would you make to an investor who was interested in purchasing this stock? Q2. (8 Marks) Given the following information about potential values for the long term growth rate: Long Term Growth Possibilities Rate Probability Best 5% 0.2 Likley 3.50% 0.5 Worst 2% 0.3 Revise your estimate of the price per share. How would you explain the difference in the price estimates to an investor? Q3. (8 Marks) The P/E multiples for three comparable companies are given below: Comparables A B C P/E 7.14 5.73 7.91 Use these multiples and the information from question one to estimate the share price. Explain the differences in the estimates of share price that you have made in this section? Section 2 (25 Marks) - The information below relates to questions 1-3. Complete the calculation made. 10% 15% 8% 77% AFC Ltd Sales growth Current assets/Sales Current liabilities/Sales Net fixed assets/Sales Costs of goods sold/Sales Depreciation rate Interest rate on debt Interest paid on cash and marketable securities Tax rate Dividend payout ratio 70% 10% 5% 4% 30% 40% 0 1 2 3 4 5 1000 1100 1210 1331 1464 1611 -700 -770 -847 -932 -1025-1127 300 330 363 399 439 483 -16 -16 -16 -16 -16 -16 3 3 3 3 3 3 Year Income statement Sales Costs of goods sold EBITDA Interest payments on debt Interest earned on cash and marketable securities Depreciation Profit before tax Taxes Profit after tax Dividends Retained earnings -100 -107 -125 - 146 -170 -198 187 210 225 240 256 273 -56 -63 -68 -72 -77 -82 131 147 158 168 179 191 -52 -59 -63-67 -72 -76 79 88 95 101 108 114 73 80 84 86 86 82 150 165 182 200 220 242 Balance sheet Cash and marketable securities Current assets Fixed assets At cost Depreciation Net fixed assets Total assets 1070 1254 1464 1704 1977 2287 -300 -407 -532 -679 -849 -1047 770 847 932 1025 1127 1240 1000 1096 1200 1310 1429 1555 80 88 97 106 117 129 Current liabilities Debt 320 320 320 320 320 320 Stock 450 450 450 450 450 450 150 238 333 434 541 656 Accumulated retained earnings Total liabilities and equity 1000 1096 1200 1310 1429 1555 Year 0 1 2 3 4 5 191 147 158 168 179 107 125 146 170 198 - 15 - 17 - 18 -20 -22 11 12 8 9 10 -184 -210 -240-273 -310 11 11 11 11 11 Free cash flow calculation Profit after tax Add back depreciation Subtract increase in current assets Add back increase in current liabilities Subtract increase in fixed assets at cost Add back after-tax interest on debt Subtract after-tax interest on cash and mkt. securities Free cash flow Valuing the firm Weighted average cost of capital Long-term free cash flow growth rate Number of Shares -2 -2 -2 -2 -2 72 74 75 76 77 12% 5% 1000 Q1. (9 Marks) Using the information supplied calculate: 1. Enterprise Value 2. Equity Value 3. Price per share If the current share price is $0.55 per share what recommendation would you make to an investor who was interested in purchasing this stock? Q2. (8 Marks) Given the following information about potential values for the long term growth rate: Long Term Growth Possibilities Rate Probability Best 5% 0.2 Likley 3.50% 0.5 Worst 2% 0.3 Revise your estimate of the price per share. How would you explain the difference in the price estimates to an investor? Q3. (8 Marks) The P/E multiples for three comparable companies are given below: Comparables A B C P/E 7.14 5.73 7.91 Use these multiples and the information from question one to estimate the share price. Explain the differences in the estimates of share price that you have made in this