Question

As a student of corporate valuation , assume that you are analysing the financial statement of ABC Ltd. for purposes of estimating the intrinsic value of the company.Presented below are statements of comprehensive income and statement of financial position for the year 2017 (actual) and 2018 (forecasted)

ABC LIMITED

STATEMENT OF FINANCIAL POSITION

                                                                              2017(Actual)         2018 (Projected/Forecasted)

                                                                             Sh.(Millions)          Sh,(Millions)

Cash and Cash Equivalents                                      10                        15

Accounts Receivable                                                15                        10

Inventory                                                                  30                        40

Propert, Plant and Equipment                                    300                      430

Accumulate Depreciation                                          (135)    (185)

Total Assets                                                            220                      310

LIABILITIES AND EQUITY

Accounts Payable                                                    30                       15

Short-Term Debt                                                       10                       25

Acruals                                                                   4                         4

10%Long-Term Debt                                                 10                       25

Ordinary Share Capital                                             100                     100

Retained Earnings                                                     6                       36

                                                                            _____                   _____

                                                                            220                      310

STATEMENT OF COMPREHENSIVE INCOME

                                                                    2017 (Atual )             2018(Projected)

                                                                    Sh.(Millions)             Sh.(Millions)

Revenues                                                      350                          500

Cost of Sales                                                (100)                       (200)

                                                                    ______                    _____

                                                                    250                        300

Other Operating Expenses                             (30)                        (30)

Depreciation                                                 (40)                         (50)

Interest Expense                                           (10)                        (30)

                                                                ______                     ______

Pretax Earnings                                           170                        200

Taxes                                                         (51)                        (60)

                                                                _____                      _______

Net Income                                              119                           140

                                                              ______                      ______

It is expected that after 2018, revenues ,EBIT (Earnings Before Interest and Tax), Non-cash charges , working capital investment and Fixed Capital investments will grow at an annual rate of 6% each year for 20 years.Thereafter, growth in revenues ,EBIT , working Capital investments will drop to an annual rate of 2% forever and fixed capital investment and non-cash will offset each other.The appropriate dicounting rate during high growth and steady state period is 10% and 8% respectively.

Required:

i)Calculate the free cash flow to ABC Ltd for the year 2018 (10 Marks)

ii)Compute the value of operations for ABC Ltd

Answer 1