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. words).
4.2 Discuss how you would approach a sensitivity analysis on the valuation of Steel Co. by answering the following questions (Max. 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.

Answer : Please review my homework carefully and suggest if this is correct

Answer # 1 :

Free cash flow projection
	Year 2	Year 3	Year 4	Year 5	Year 6	After Year 6
EBIT	$203,700	$157,400	$131,000	$133,000	$138,300	$140,000
Effective tax rate	40%	40%	40%	40%	40%	40%
After-tax EBIT	$122,220	$94,440	$78,600	$79,800	$82,980	$84,000
Adjustments:
MINUS Assets	$115,000	$102,000	$83,200	$38,000	$38,900	$40,200
PLUS Operating liabilities	$34,500	$34,500	$26,000	$9,100	$9,300	$9,600
Free cash flow	$41,720	$26,940	$21,400	$50,900	$53,380	$53,400

Answer # 2 :

Calculate the terminal value of the cash flow after Year 6.
Free cash flow projection
					After Year 6
EBIT					$138,300
Effective tax rate					40%
After-tax EBIT					$82,980
Adjustments:
MINUS Assets					$40,200
PLUS Operating liabilities					$9,600
Projected cash flow for the first year after maturity			$52,380
WACC					8%
Growth rate					3%
Terminal value					$1,079,028

Answer # 3 :

Free cash flow projection
	Year 2	Year 3	Year 4	Year 5	Year 6
Free cash flow	$41,720	$26,940	$21,400	$50,900	$53,380
WACC	8%	8%	8%	8%	8%
Present value of FCF	$35,768	$21,386	$15,730	$34,642	$33,638
Sum of FCF PV	$141,164
Terminal value					$1,099,628.00
Present value of terminal value	$692,952
Net debt	$240,000
Equity value of company	$834,116
Number of outstanding shares	27,250
Per-share fair value estimation	$30.61

Answer # 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. words).
Start writing here: [Upon conducting a thorough examination of the available information, it appears that Steel Co. may be undervalued in the market. Based on the discounted cash flow valuation method, the company's estimated worth is around $834,116, which surpasses its current market capitalization of $569,797.50. Furthermore, the per-share fair value estimation from the DCF analysis is $30.61, while the current share price is $20.91. These factors suggest that acquiring Steel Co. at a price near its market capitalization could potentially prove to be a beneficial opportunity with significant growth prospects. However, before making a final decision, it's crucial to consider other crucial factors, such as the strategic alignment of Steel Co. with the acquiring company's portfolio, potential synergies, and market conditions] [ Words]
4.2 Discuss how you would approach a sensitivity analysis on the valuation of Steel Co. by answering the following questions (Max. words):
4.2.1 Identify the key parameters and assumptions that affect your DCF valuation of Steel Co.
Start writing here (Select any three): [The DCF valuation of Steel Co. heavily depends on various key parameters and assumptions that must be considered. These include the Free cash flow (FCF), projected to vary with changes in revenue, expenses, or taxes, directly impacting the company's valuation. Another crucial factor is the Terminal growth rate, which is assumed to be 3% in this case and plays a significant role in determining the terminal value and overall valuation. Adjusting the Discount rate (WACC), which represents the risk and required rate of return for the investment, would also affect the present value of the projected cash flows and consequently influence the company's valuation. Additionally, the Terminal date, Capital expenditures, and Operating expenses and margins are other essential considerations that can significantly impact the resulting valuation of Steel Co. Therefore, it is vital to carefully assess and analyze these factors to arrive at an accurate and informed valuation of the company.] [ Words]
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).
Start writing here: In considering the potential impact of exchange rate fluctuations on Steel Co., it's worth noting that an appreciating rate could lead to increased revenue from exports. At the same time, however, it's important to be mindful of any negative effects on imports that could ultimately result in higher costs and reduced profitability. Maintaining careful oversight of these factors is key to ensuring the best possible outcome for the company.
A decrease in the demand for steel due to an economic downturn.
Start writing here: A decline in steel demand resulting from an economic downturn would likely have a negative impact on Steel Co.'s sales and revenue. The decrease in projected cash flows would consequently decrease the company's valuation. These factors hold significant importance when assessing the financial implications for Steel Co. An understanding of how exchange rate movements can affect the company's competitiveness in export markets, as well as the potential risks associated with increased costs from imports, is essential. Moreover, recognizing the potential impact of an economic downturn on steel demand is crucial for evaluating the company's future cash flows and ultimately determining its valuation.