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You are the head of the acquisitions department of a company. The potential investment in a steel manufacturing company, Steel Co., is currently under review.
| You are the head of the acquisitions department of a company. The potential investment in a steel manufacturing company, Steel Co., is currently under review. Below is some information about the projections. | |||||||||||
| Year 2 | Year 3 | Year 4 | Year 5 | Year 6 | After Year 6 | ||||||
| Growth rate estimation | 5% | 3% | 2% | 4% | 5% | 3% | |||||
| EBIT | $203,700 | $157,400 | $131,000 | $133,000 | $138,300 | $140,000 | |||||
| Assets | $115,000 | $102,000 | $83,200 | $38,000 | $38,900 | $40,200 | |||||
| Operating liabilities | $34,500 | $34,500 | $26,000 | $9,100 | $9,300 | $9,600 | |||||
| Number of outstanding shares | 27,250 | ||||||||||
| Current share price | $20.91 | ||||||||||
| Net debt | $240,000 | ||||||||||
| WACC | 8% | ||||||||||
| Inflation | 3% | ||||||||||
| Effective tax rate | 40% | ||||||||||
| Terminal growth rate | 3% | ||||||||||
| Terminal date | Year 6 | ||||||||||
| Extract from the reformatted income statement | |||||||||||
| Year 0 | Year 1 | ||||||||||
| Tons of steel sold | 26,000 | 33,100 | |||||||||
| Selling price per ton | $630 | $620 | |||||||||
| Cost price per ton | $540 | $545 | |||||||||
| Sales | $16,380,000 | $20,522,000 | |||||||||
| Cost of goods sold | $14,040,000 | $18,039,500 | |||||||||
| Gross profit | $2,340,000 | $2,482,500 | |||||||||
| Sales, general, and admin costs | -$234,000 | -$248,250 | |||||||||
| Operating expenses | -$1,962,000 | -$2,040,250 | |||||||||
| EBIT | $144,000 | $194,000 | |||||||||
| Extract from the reformatted balance sheet | |||||||||||
| Year 0 | Year 1 | ||||||||||
| Accounts receivable | $1,723,400 | $2,241,000 | |||||||||
| Inventory | $2,480,000 | $3,462,000 | |||||||||
| Other current assets | $6,222,050 | $5,100,860 | |||||||||
| Ending PPE (net) | $5,078,650 | $5,093,140 | |||||||||
| Total assets | $15,504,100 | $15,897,000 | |||||||||
| Accounts payable | $776,809 | $1,042,146 | |||||||||
| Other current liabilities | $5,825,971 | $5,284,134 | |||||||||
| Long-term operating liabilities | $3,941,020 | $3,942,420 | |||||||||
| Capital | $4,960,300 | $5,628,300 | |||||||||
| Liabilities and owner's equity | $15,504,100 | $15,897,000 | |||||||||
| Answer the following questions based on this information in the corresponding answer tabs provided: | |||||||||||
| Question 1 | |||||||||||
| Calculate a five-year free cash flow for Steel Co., starting from Year 2. | |||||||||||
| Question 2 | |||||||||||
| Calculate the terminal value of the cash flow after Year 6. | |||||||||||
| Question 3 | |||||||||||
| Calculate the discounted cash flow value for Steel Co. | |||||||||||
| Question 4 | |||||||||||
| 4.1 Use the valuation done as per Questions 1 to 3 and recommend whether to extend an acquisition offer and explain your decision (Max. 200 words). | |||||||||||
| 4.2 Discuss how you would approach a sensitivity analysis on the valuation of Steel Co. by answering the following questions (Max. 200 words): | |||||||||||
| 4.2.1 Identify the key parameters and assumptions that affect your DCF valuation of Steel Co. | |||||||||||
| 4.2.2 How will the following change the valuation (increase or decrease in the calculated value of Steel Co.)? | |||||||||||
| An appreciation in the exchange rate (effect on exports and imports). | |||||||||||
| A decrease in the demand for steel due to an economic downturn. | |||||||||||
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Financial Management for Public Health and Not for Profit Organizations
Authors: Steven A. Finkler, Thad Calabrese
4th edition
133060411, 132805669, 9780133060416, 978-0132805667
