Section 3: Valuation of the Firm (16 marks) Fastfix is being considered by a rival as a takeover target. Fastfix are aware of the interest of the rival firm, so they want to assess what would be a fair value of the firm as a basis for negotiations to sell. You are to calculate this fair value based on the 2012 position and use the following information on growth. For the next five years, sales will grow by 10 percent and after that the long-term growth is estimated to be 5 percent in perpetuity. The free cashflow for 2012 is $28500' and the cost of debt is 6% Required: i. Calculate the cost of equity using 2012 share price and dividend/share and 10% growth rate (use Gordon Growth model) (2 marks) ii. Calculate the capital structure using market value weights for equity and book value for debt (3 marks) iii. Calculate the WACC (2 marks) iv. Calculate the value of the firm today by projecting growth at 10% for the next five years and after that a growth of 5% in perpetuity (9 marks) Note 1. The free cash flow is calculated from the net income for 2012 and adjusting for changes in current assets, current liabilities, fixed assets and then adding back depreciation. This calculation is outside the scope of this paper. Financial Ratio Formulae (for this analysis). Working Capital Current Ratio Current Assets - Current liabilities Current Assets/Current liabilities Inventory turnover (times) Cost of goods sold/End of year inventory Accounts Receivable turnover Annual Sales/Accounts Receivable (times) Average collection period (365 x Accounts Receivable), Sales (ACP) (days) Payables Deferral period (Payables x 365)/COGS (PDP) (days) Inventory Conversion Period (Inventory x 365)COGS (ICP) (days) Cash Conversion Cycle (CCC) ACP + ICP - PDP (days) Debt to Total Assets All Debt/Total Assets Times interest earned EBIT/Interest charges Section 3: Valuation of the Firm (16 marks) Fastfix is being considered by a rival as a takeover target. Fastfix are aware of the interest of the rival firm, so they want to assess what would be a fair value of the firm as a basis for negotiations to sell. You are to calculate this fair value based on the 2012 position and use the following information on growth. For the next five years, sales will grow by 10 percent and after that the long-term growth is estimated to be 5 percent in perpetuity. The free cashflow for 2012 is $28500' and the cost of debt is 6% Required: i. Calculate the cost of equity using 2012 share price and dividend/share and 10% growth rate (use Gordon Growth model) (2 marks) ii. Calculate the capital structure using market value weights for equity and book value for debt (3 marks) iii. Calculate the WACC (2 marks) iv. Calculate the value of the firm today by projecting growth at 10% for the next five years and after that a growth of 5% in perpetuity (9 marks) Note 1. The free cash flow is calculated from the net income for 2012 and adjusting for changes in current assets, current liabilities, fixed assets and then adding back depreciation. This calculation is outside the scope of this paper. Financial Ratio Formulae (for this analysis). Working Capital Current Ratio Current Assets - Current liabilities Current Assets/Current liabilities Inventory turnover (times) Cost of goods sold/End of year inventory Accounts Receivable turnover Annual Sales/Accounts Receivable (times) Average collection period (365 x Accounts Receivable), Sales (ACP) (days) Payables Deferral period (Payables x 365)/COGS (PDP) (days) Inventory Conversion Period (Inventory x 365)COGS (ICP) (days) Cash Conversion Cycle (CCC) ACP + ICP - PDP (days) Debt to Total Assets All Debt/Total Assets Times interest earned EBIT/Interest charges