Your company has requested you to estimate its value under alternative assumptions about the company's performance. Required: 3.1. Using the discounted cash flow (DCF) approach to valuation, provide an estimate of your company's value. (20) You must consider the following assumptions in your estimation: • Use the financial information of the company of your choice to estimate the current sales. The sales are expected to grow at a rate of 5 percent per year for the next four years, and then at 3 percent per year into perpetuity. • The pre-tax operating margin ratio to sales will be 15% for the next four years and then stabilise at 20% henceforth. • The working capital requirement to sales ratio from year 1 onwards will remain at 18% into perpetuity. The company has R500 million of outstanding debt. It can borrow at 6%. •The company's income tax rate is 27%. • Its beta is 1.05. The risk-free rate and the market risk premium are 5 %. • The debt-to-total - capital ratio of the company, at market value, is 50%. In your valuation, you are expected to make additional assumptions relevant to your company or industry where such information is not provided above. 3.2. Using your finding in 3.1 above together with the data provided, determine the company's ordinary share value. (2) 3.3. Based on the number of shares the company plans to issue, determine the value of each share. (2) 3.4. Assess if the value per share is acceptable to the market. (3) 3.5. The sustainability of the performance of your company for next four years is dependent on how business and financial risks are managed. Evaluate the business and financial risks for your company.
Your company has requested you to estimate its value under alternative assumptions about the company's performance. Required: 3.1. Using the discounted cash flow (DCF) approach to valuation, provide an estimate of your company's value. (20) You must consider the following assumptions in your estimation: • Use the financial information of the company of your choice to estimate the current sales. The sales are expected to grow at a rate of 5 percent per year for the next four years, and then at 3 percent per year into perpetuity. • The pre-tax operating margin ratio to sales will be 15% for the next four years and then stabilise at 20% henceforth. • The working capital requirement to sales ratio from year 1 onwards will remain at 18% into perpetuity. The company has R500 million of outstanding debt. It can borrow at 6%. •The company's income tax rate is 27%. • Its beta is 1.05. The risk-free rate and the market risk premium are 5 %. • The debt-to-total - capital ratio of the company, at market value, is 50%. In your valuation, you are expected to make additional assumptions relevant to your company or industry where such information is not provided above. 3.2. Using your finding in 3.1 above together with the data provided, determine the company's ordinary share value. (2) 3.3. Based on the number of shares the company plans to issue, determine the value of each share. (2) 3.4. Assess if the value per share is acceptable to the market. (3) 3.5. The sustainability of the performance of your company for next four years is dependent on how business and financial risks are managed. Evaluate the business and financial risks for your company.
Chapter3: Evaluation Of Financial Performance
Section: Chapter Questions
Problem 10P
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Transcribed Image Text:Your company has requested you to estimate its value under alternative assumptions about
the company's performance.
Required:
3.1. Using the discounted cash flow (DCF) approach to valuation, provide an estimate of
your company's value. (20)
You must consider the following assumptions in your estimation:
• Use the financial information of the company of your choice to estimate the current
sales. The sales are expected to grow at a rate of 5 percent per year for the next
four years, and then at 3 percent per year into perpetuity.
• The pre-tax operating margin ratio to sales will be 15% for the next four years and
then stabilise at 20% henceforth.
• The working capital requirement to sales ratio from year 1 onwards will remain at
18% into perpetuity.
Transcribed Image Text:The company has R500 million of outstanding debt. It can borrow at 6%.
•The company's income tax rate is 27%.
• Its beta is 1.05. The risk-free rate and the market risk premium are 5 %.
• The debt-to-total - capital ratio of the company, at market value, is 50%.
In your valuation, you are expected to make additional assumptions relevant to your company
or industry where such information is not provided above. 3.2. Using your finding in 3.1 above together with the data
provided, determine the
company's ordinary share value. (2)
3.3. Based on the number of shares the company plans to issue, determine the value of
each share. (2)
3.4. Assess if the value per share is acceptable to the market. (3)
3.5. The sustainability of the performance of your company for next four years is dependent
on how business and financial risks are managed. Evaluate the business and financial
risks for your company.
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