SECTION B: QUESTION TWO

Puzzling Co wants to estimate the value attributable to equity using the shareholder value analysis (SVA) model.

The sales and operating profits of Puzzling Co for the last four years are shown below. It is estimated that Puzzling Co needs incremental fixed capital investment of 23% of the change in sales, and incremental working capital investment of 9% of the change in sales, to drive sales growth over the next 5 years (the planning horizon).

(All amounts are in 000s)

Year ended 31 December	2016	2017	2018	2019
Sales revenue	8,088	8,508	8,904	9,270
Operating costs	6,066	6,372	6,648	6,906
Operating profit	2,022	2,136	2,256	2,364

Assume that the current corporation tax rate is 20%, but the government has announced that it intends to increase this to 22% in the near future. It can be assumed that Puzzling Cos current weighted average cost of capital is 14%. Puzzling Co has 420,000 cash in the bank, financial assets currently worth 720,000 and debt currently worth 4,000,000.

REQUIRED

1. Identify the seven value drivers of the SVA model and estimate the values where they have not been provided.

(4 marks)

2. Using the SVA model, calculate the value of Puzzling Co, and its share price, if there are 2,800,000 shares in issue.

(8 marks)

3. Discuss the practical limitations of using the SVA model to value a company.

(8 marks)