roma’s Industry is 1.3 (Preferred stocks are considered as debt financing)

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Statement of Financial position for Aroma Corporation is given below for the period ending Dec 31 2020.

 

*All values given in ‘000 $.

 

Other Information:

PAT = 320

EBIDTA=428

Rf= 5%

Rm= 15 %

Geared Beta of Aroma’s Industry is 1.3

(Preferred stocks are considered as debt financing)

 

Profit Margin and Market Share of Aroma Corporation are constantly declining for last 3 years and various options are being discussed at board level for getting into a new venture with a fresh Brand Name and better product Quality and shut down the operations in existing name.

 

A competitor has also offered to acquire operations of Aroma Corporation.

On the other hand, a group of investors still believe that company has potential to grow due to its old customer base which are quite satisfied by the offered services and are ready to inject more debt in the company.

 

Analyst to CFO has gathered below information to be used in strategic Planning.

 

Cost of Debt = 18%

Tax Rate = 25%

 

For coming 5 Years there isn’t any chance of growth in Market share and profit but after 5 years a constant growth of 9 % is expected.

Future Cashflow for a period of 5 Years:

 

Yrs.

Cash Flows

1

106

2

121

3

100

4

112

5- Terminal

100

 

CEO has advised to have a concrete information about company’s value and a suggestion of using various range of company’s value is given by Finance director.

Required:

You, as a Financial strategist will be leading the presentation in next Board meeting and you are required to calculate Value of Aroma Corporation with following methods:

 

Asset Based Valuation 

Earning Based Valuation 

Cashflow Based Valuation 

You are also expected to explain silent features of these 3 methods.  

 

 

Assets
Liabilities and Equity
Cash
Accounts Payble
|Аccruals
Salaries Payble
32
211
Bank Accounts
66
63
Prepaid Assests
Inventories
121
54
350
Total Current
569
Total Current
328
Assets
Liabilites
Long term Bonds
Prefered Stock
Retained Earning
Common Equity
Land
179
189
190
Building
187
96
103
366
218
Total Assets
935
935
Transcribed Image Text:Assets Liabilities and Equity Cash Accounts Payble |Аccruals Salaries Payble 32 211 Bank Accounts 66 63 Prepaid Assests Inventories 121 54 350 Total Current 569 Total Current 328 Assets Liabilites Long term Bonds Prefered Stock Retained Earning Common Equity Land 179 189 190 Building 187 96 103 366 218 Total Assets 935 935
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