Section 3: Valuation of the Firm

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 $28500¹ 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)

ii.Calculate the capital structure using market value weights for equity and book value for debt

iii.Calculate the WACC

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

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 Assets - Current liabilities

Current Ratio

Current Assets/Current liabilities

Inventory turnover (times)

Cost of goods sold/End of year inventory

Accounts Receivable turnover (times)

Annual Sales/Accounts Receivable

Average collection period (ACP) (days)

(365 x Accounts Receivable)/ Sales

Payables Deferral period (PDP) (days)

(Payables x 365)/COGS

Inventory Conversion Period (ICP) (days)

(Inventory x 365)/COGS

Cash Conversion Cycle (CCC) (days)

ACP + ICP - PDP

Debt to Total Assets

All Debt/Total Assets

Times interest earned

EBIT/Interest charges