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Section 2 (25 Marks) - The information below relates to questions 1-3. Complete the calculations requested, show your working, and answer the questions based on
Section 2 (25 Marks) - The information below relates to questions 1-3. Complete the calculations requested, show your working, and answer the questions based on the calculations made.
AFC Ltd | ||||||
Sales growth | 10% | |||||
Current assets/Sales | 15% | |||||
Current liabilities/Sales | 8% | |||||
Net fixed assets/Sales | 77% | |||||
Costs of goods sold/Sales | 70% | |||||
Depreciation rate | 10% | |||||
Interest rate on debt | 5% | |||||
Interest paid on cash and marketable securities | 4% | |||||
Tax rate | 30% | |||||
Dividend payout ratio | 40% | |||||
Year | 0 | 1 | 2 | 3 | 4 | 5 |
Income statement | ||||||
Sales | 1000 | 1100 | 1210 | 1331 | 1464 | 1611 |
Costs of goods sold | -700 | -770 | -847 | -932 | -1025 | -1127 |
EBITDA | 300 | 330 | 363 | 399 | 439 | 483 |
Interest payments on debt | -16 | -16 | -16 | -16 | -16 | -16 |
Interest earned on cash and marketable securities | 3 | 3 | 3 | 3 | 3 | 3 |
Depreciation | -100 | -107 | -125 | -146 | -170 | -198 |
Profit before tax | 187 | 210 | 225 | 240 | 256 | 273 |
Taxes | -56 | -63 | -68 | -72 | -77 | -82 |
Profit after tax | 131 | 147 | 158 | 168 | 179 | 191 |
Dividends | -52 | -59 | -63 | -67 | -72 | -76 |
Retained earnings | 79 | 88 | 95 | 101 | 108 | 114 |
Balance sheet | ||||||
Cash and marketable securities | 80 | 84 | 86 | 86 | 82 | 73 |
Current assets | 150 | 165 | 182 | 200 | 220 | 242 |
Fixed assets | ||||||
At cost | 1070 | 1254 | 1464 | 1704 | 1977 | 2287 |
Depreciation | -300 | -407 | -532 | -679 | -849 | -1047 |
Net fixed assets | 770 | 847 | 932 | 1025 | 1127 | 1240 |
Total assets | 1000 | 1096 | 1200 | 1310 | 1429 | 1555 |
Current liabilities | 80 | 88 | 97 | 106 | 117 | 129 |
Debt | 320 | 320 | 320 | 320 | 320 | 320 |
Stock | 450 | 450 | 450 | 450 | 450 | 450 |
Accumulated retained earnings | 150 | 238 | 333 | 434 | 541 | 656 |
Total liabilities and equity | 1000 | 1096 | 1200 | 1310 | 1429 | 1555 |
Year | 0 | 1 | 2 | 3 | 4 | 5 |
Free cash flow calculation | ||||||
Profit after tax | 147 | 158 | 168 | 179 | 191 | |
Add back depreciation | 107 | 125 | 146 | 170 | 198 | |
Subtract increase in current assets | -15 | -17 | -18 | -20 | -22 | |
Add back increase in current liabilities | 8 | 9 | 10 | 11 | 12 | |
Subtract increase in fixed assets at cost | -184 | -210 | -240 | -273 | -310 | |
Add back after-tax interest on debt | 11 | 11 | 11 | 11 | 11 | |
Subtract after-tax interest on cash and mkt. securities | -2 | -2 | -2 | -2 | -2 | |
Free cash flow | 72 | 74 | 75 | 76 | 77 | |
Valuing the firm | ||||||
Weighted average cost of capital | 12% | |||||
Long-term free cash flow growth rate | 5% | |||||
Number of Shares | 1000 |
Q1. (9 Marks)
Using the information supplied calculate:
- Enterprise Value
- Equity Value
- 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?
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