As an analyst in the valuation team your job is to perform significant financial modeling and analysis. Your company is seeing a new sales strategy that require your input. The strategy will be effective for the upcoming 4 Years. If the company adopts the new strategy, sales will grow at the rate of 15% per year for three years. Other ratios such as: Asset turnover, gross margin, the capital structure and income tax will remain unchanged. However,
|
Income Statement |
|
|
Sales |
50,000 |
|
Gross Margin (15%) |
7,500 |
|
Admin., selling and Distribution expenses (7%) |
3,500 |
|
Profit before tax |
10,000 |
|
Tax (35%) |
3,500 |
|
Profit After Taxes |
6,500 |
|
|
|
|
Fixed Assets |
17,000 |
|
Current Assets |
12,000 |
|
Equity |
25,000 |
- Determine value of business before adoption of new strategy?
- What will be the incremental value and value of business after adoption of this new strategy?
- Provide detailed comments should the company proceeds with this new strategy or Not?
ANS ( 1 AND 2 part of this Question is already solved in just need 3rd part detailed comment)
1.
Determine value of business before adoption of new strategy
Value of business = PAT/r
= 6500/12%
= 54166.66
2.
|
|
1 |
2 |
3 |
4 |
|
Sales |
57500 |
66125 |
76043.75 |
87450.31 |
|
Profit After Taxes ( 13% of sales) |
7475 |
8596.25 |
9885.688 |
11368.54 |
|
ADD: Depreciation |
1360 |
8596.25 |
1798.6 |
2068.39 |
|
Less: Capital Expenditure |
-3910 |
-4496.5 |
-5170.98 |
-5946.62 |
|
Less: Increase In Current Asset |
-1800 |
-2070 |
-2308.5 |
-2737.58 |
|
|
3125 |
3594 |
4133 |
4753 |
Value under New Strategy
=3125(1+.12)1+3594(1+.12)2+4133(1+.12)3+4753(1+.12)4+4753(1+.12)5+….
=3125/(1+.12)1+3594/(1+.12)2+4133/(1+.12)3+1/(1.12)3×[4753/]
=2790.1786+2865.1148+2941.7878+28192.4293
=36789.5105
Working Data
Calculate Depreciation and Purchase of Fixed Asset
|
|
0 |
1 |
2 |
3 |
4 |
|
Sales |
50000 |
57500 |
66125 |
76043.75 |
87450.3125 |
|
Fixed Asset |
17000 |
19550 |
22482.5 |
25854.88 |
29733.1063 |
|
Ratio |
34% |
34% |
34% |
34% |
34% |
Calculate Increase In Current Assets:
Incremental Value
=Value under New Strategy – Value Under Old Strategy
=36789.5108 – 54166.6667
=17377.1562
3. ( I NEED DETAILED COMMENTS OF C PART)
Step by step
Solved in 2 steps
