You are a financial analyst at Beta Ltd., a company that is considering acquiring Alpha Ltd. You have been tasked to perform a discounted cash flow (DCF) valuation analysis in Excel to determine the value of the target company and advise on whether the acquisition would be financially beneficial. The following information is provided: 1. Alpha Ltd. revenues were Sh.12.5 million. This revenue is expected to grow at a constant annual growth rate of 7.5% over the next 5 years. 2. Alpha’s Ltd. gross profit margin is 75%. 3. The target company currently has Sh.8 million in debt and Sh. 3 million in equity. 4. Selling general, administration and other expenses is expected to be 45% of sales. 5. Depreciation is expected to be 2.5% of sales. 6. Net capital expenditures are expected to be 2.5% of net revenue annually. 7. Changes in net working capital are expected to amount to Sh.500,000, Sh.600,000, Sh.700,000, Sh.800,000 and Sh.900,000 in the next 5 years respectively. 8. The cost of debt is 12.5%. 9. After the sixth year, free cash flows are expected to grow at a rate of 3% per year indefinitely. 10. The risk-free rate is 7.5%. 11. The expected market rate of return is 13.75% 12. The industry beta is 1.85. 13. The corporate tax rate is 25%. 14. The number of outstanding ordinary shares is 500,000.
You are a financial analyst at Beta Ltd., a company that is considering acquiring Alpha Ltd. You have been tasked to perform a discounted cash flow (DCF) valuation analysis in Excel to determine the value of the target company and advise on whether the acquisition would be financially beneficial. The following information is provided: 1. Alpha Ltd. revenues were Sh.12.5 million. This revenue is expected to grow at a constant annual growth rate of 7.5% over the next 5 years. 2. Alpha’s Ltd. gross profit margin is 75%. 3. The target company currently has Sh.8 million in debt and Sh. 3 million in equity. 4. Selling general, administration and other expenses is expected to be 45% of sales. 5. Depreciation is expected to be 2.5% of sales. 6. Net capital expenditures are expected to be 2.5% of net revenue annually. 7. Changes in net working capital are expected to amount to Sh.500,000, Sh.600,000, Sh.700,000, Sh.800,000 and Sh.900,000 in the next 5 years respectively. 8. The cost of debt is 12.5%. 9. After the sixth year, free cash flows are expected to grow at a rate of 3% per year indefinitely. 10. The risk-free rate is 7.5%. 11. The expected market rate of return is 13.75% 12. The industry beta is 1.85. 13. The corporate tax rate is 25%. 14. The number of outstanding ordinary shares is 500,000.
Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Eugene F. Brigham, Phillip R. Daves
Chapter8: Basic Stock Valuation
Section: Chapter Questions
Problem 9MC
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| You are a financial analyst at Beta Ltd., a company that is considering acquiring Alpha Ltd. You have been tasked to perform a discounted cash flow (DCF) valuation analysis in Excel to determine the value of the target company and advise on whether the acquisition would be financially beneficial. | ||||||||
| The following information is provided: | ||||||||
| 1. Alpha Ltd. revenues were Sh.12.5 million. This revenue is expected to grow at a constant annual growth rate of 7.5% over the next 5 years. | ||||||||
| 2. Alpha’s Ltd. gross profit margin is 75%. | ||||||||
| 3. The target company currently has Sh.8 million in debt and Sh. 3 million in equity. | ||||||||
| 4. Selling general, administration and other expenses is expected to be 45% of sales. | ||||||||
| 5. Depreciation is expected to be 2.5% of sales. | ||||||||
| 6. Net capital expenditures are expected to be 2.5% of net revenue annually. | ||||||||
| 7. Changes in net working capital are expected to amount to Sh.500,000, Sh.600,000, Sh.700,000, Sh.800,000 and Sh.900,000 in the next 5 years respectively. | ||||||||
| 8. The cost of debt is 12.5%. | ||||||||
| 9. After the sixth year, free cash flows are expected to grow at a rate of 3% per year indefinitely. | ||||||||
| 10. The risk-free rate is 7.5%. | ||||||||
| 11. The expected market rate of return is 13.75% | ||||||||
| 12. The industry beta is 1.85. | ||||||||
| 13. The corporate tax rate is 25%. | ||||||||
| 14. The number of outstanding ordinary shares is 500,000. |
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