The following are extracts (re-organized) of financial statements ofNyayo Limited, a company in the manufacturing sector. The extracts are for the most recent period

NYAYO LIMITED

STATEMENT OF INCOME

FOR THE PERIOD ENDED 31ST DECEMBER, 2019

Sh' Millions

Sh' Millions

Revenues

500.00

Gain on disposal

50.00

550.00

Less: Operating Expenses

100.00

450.00

Other Expenses:

Depreciation

25.00

Amortization

5.00

Interest Expenses

20.00

50.00

Pre-Tax Earnings

400.00

Tax

120.00

Net Income

280.00

Appropriations

Net Income

280.00

Dividends

224.00

Retained Earnings

56.00

NYAYO LIMITED

STATEMENT OF FINANCIAL POSITION

FOR THE PERIOD ENDED 31ST DECEMBER, 2019

Sh' Millions

Sh' Millions

Sh' Millions

ASSETS

Property, Plant and Equipment

500.00

CURRENT ASSETS

Cash and Marketable Securities

30.00

Inventory

40.00

Accounts Receivables

60.00

130.00

Less: CURRENT LIABILITIES

Accruals

10.00

Trade Payables

40.00

Short-Term Loans

20.00

Notes Payable

5.00

75.00

Working Capital

55.00

NET ASSETS

555.00

FINANCED BY:

10% Debt

100.00

Ordinary Share Capital

300.00

Retained Earnings

155.00

455.00

TOTAL FINANCING

555.00

Additional information

(i)Revenues are expected to growat an annual rate of 10% each for five years and 5% thereafter forever

(ii)Current assets and current liabilities are expected to grow as revenues

(iii)Property, plant and equipment expected to grow as revenues and to off-set each other in the steady state period

(iv)Income statement items are expected to grow as revenues except for depreciation which has a direct proportional relationship withProperty, plant and equipment

(v)Retained earnings depends on the dividend policy of the company

(vi)Nyayo Limited has settled on a debt-Equity ratio of 30%. At this level of debt-Equity ratio, pre-tax cost of debt is expected to be 10%

(vii)Based on historical data the following estimates have been provide

Risk free rate of return

5

Average Return on Market

12

Levered Beta ofNyayo Limited

1.5

Required:

(a)Based on the information provided, project the income statement and financial position for year 2019. Based on the projections, compute for the year 2019;

(i)Investment in working capital

(ii)Investment in fixed capital

(iii)Operating EBIT

(iv)Non-Cash Charges

(12 Marks)

(b)Compute free cash flow to Nyayo limited for years 2019

(3 Marks)

(c)Estimate

(i)After tax cost of debt

(ii)Cost of equity

(iii)Weighted average cost of capital

(9 Marks)

(d)Compute the terminal value

(6 Marks)

(e)Using DCF approach, estimate the value of operations ofthe company

(5 Marks)