You are the financial manager of a company with market value of debt $300,000 and equity $700,000. The cost of debt is 4% for your company and cost of equity is 11%. Your company is tempted to acquire Company Z. You want to estimate the value of Company Z. The following table sets out the information that you need to forecast company Z's free cash flows (the highlighted numbers are all forecasted numbers). You can assume the cash flow in year has already occurred when you calculate the value of the business. Value horizon is 2 years. From year 3 onward, you assume a long-term growth rate of 3% cach year . Company Z is in the same line of business as your company, so you can assume that it has the same business risk and debt capacity as your company. Marginal tax rates for both companies are 21%. 0 2 171,000 136,800 170,000 136,000 100,000 7,000 160,000 Sales Cost of goods sold Net working capital Depreciation Gross fixed assets Investment in fixed assets (change in gross fixed assets) Investment in working capital 104,200 172,000 137,600 108,200 7,000 188,000 178,000 138,600 112,200 7,000 201,000 7,000 175,000 15000 4000 You will use "adjust discount rate" approach to calculate the value of Company Z (keep four decimals). Show are your inputs to get full credit. [29 points) (a). What's the discount rate you will use to discount the froc cash flow? 13 points) (b). Forecast Company Z's after-tax profit over the next 3 years. Show your work to derive the after-tax profit in year 3 (don't need to show after-tax profit in year 1 and 2) [5 points) (). Calculate free cash flows over the next 3 years. Specifically, what's the free cash flow in year 3 (don't need to show your work to drive free cash flow in year 1 and 2)? [7 points] (d). What's the present value of horizon value? [6 points) (e). What's the present value of the firm? [8 points) You are the financial manager of a company with market value of debt $300,000 and equity $700,000. The cost of debt is 4% for your company and cost of equity is 11%. Your company is tempted to acquire Company Z. You want to estimate the value of Company Z. The following table sets out the information that you need to forecast company Z's free cash flows (the highlighted numbers are all forecasted numbers). You can assume the cash flow in year has already occurred when you calculate the value of the business. Value horizon is 2 years. From year 3 onward, you assume a long-term growth rate of 3% cach year . Company Z is in the same line of business as your company, so you can assume that it has the same business risk and debt capacity as your company. Marginal tax rates for both companies are 21%. 0 2 171,000 136,800 170,000 136,000 100,000 7,000 160,000 Sales Cost of goods sold Net working capital Depreciation Gross fixed assets Investment in fixed assets (change in gross fixed assets) Investment in working capital 104,200 172,000 137,600 108,200 7,000 188,000 178,000 138,600 112,200 7,000 201,000 7,000 175,000 15000 4000 You will use "adjust discount rate" approach to calculate the value of Company Z (keep four decimals). Show are your inputs to get full credit. [29 points) (a). What's the discount rate you will use to discount the froc cash flow? 13 points) (b). Forecast Company Z's after-tax profit over the next 3 years. Show your work to derive the after-tax profit in year 3 (don't need to show after-tax profit in year 1 and 2) [5 points) (). Calculate free cash flows over the next 3 years. Specifically, what's the free cash flow in year 3 (don't need to show your work to drive free cash flow in year 1 and 2)? [7 points] (d). What's the present value of horizon value? [6 points) (e). What's the present value of the firm? [8 points)
