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1 question (70%) The Bergeson Corporation sold its shares to the general public in 2019. The firms estimated free cash flow for the next four year is as follows: Given: Sales growth for years 1-3 Operating profit margin Net working capital to sales ratio Property, plant, and equipment to sales ratio Beginning sales Cash tax rate Total liabilities 10. 16 13 18 S 27,272.73 30. S 4,000. Cost of capital Number of shares 2,000 Bergeson is estimating its free cash flow that would form perpetuity beginning in year 4 Furthermore, the firms investment banker conducted a study of the firms cost of capital and estimated the weighted average cost of capital to be approximately 12 percent Required- a. What is the market value of Bergeson using free cash flow valuation model? b. Given that Bergesons invested capital in year 0 is $9 818,18, what is the market value added (MVA) for Bergeson? c. What is the Shareholders value added (SVA) for Bergeson? d f Bergeson has 2000 shares of common stock outstanding and üabilities (debi) valued at $ 4000, what is the value per share of its stock? Years 2 4 and thereafter Change in current assets Current assets S 4,909.09 tal expenditures Property, plant and equipment Total Capital-Total Assets-Non-interest$9,818.18 liabilities 4,909.09
FREE CASH FLOWS: Years 4 and thereafter Sales Operating income (Earnings Before Interest and Taxes) Less cash tax payments Net operating profits after taxes (NOPAT Less investments Investment in Net Working Capital Capital expenditures (CAPEX) Total investments PV of FCH Present value of free cash flows: Planning horizon cash flows Terminal value in year 4 a) Firm value Invested capital (year 0) b) Market Value Added c) Shareholder Value Added No. of shares
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Answer #1
Projected (partial) cash flow Statement
Year 0 1 2 3 4 Perpetuity
Sales        27,273        30,000        33,000        36,300        39,930             39,930
Sales growth 10%
Operating profit margin 16%
Operating income           4,364           4,800           5,280           5,808           6,389               6,389
Tax rate 30%
Tax liability           1,309           1,440           1,584           1,742           1,917               1,917
NOPAT           3,055           3,360           3,696           4,066           4,472               4,472
Working capital rate 13%
Investment in WC (Incremental)           3,545              355              390              429              472                  472
Fixed asset rate 18%
Fixed investment rate           4,909              491              540              594              653                  653
Total investments           8,455              845              930           1,023           1,125               1,125
FCFF         (5,400)           2,515           2,766           3,043           3,347               3,347
Cost of capital 12%
PV of FCFF         (5,400)           2,245           2,205           2,166           2,127             15,826
terminal value in year 4        27,891
PV of terminal value        15,826
NPV of FCFF        19,169
Firm value=        19,169
Invested capital           9,818
MVA           9,350
Debt           4,000
Shareholders value added           5,350
no of shares           2,000
Value added per share             2.68

Note-

Working capital need not be infused every year as it is the cash in business. Only additional WC as a % of sales needs to be infused
Fixed investments depreciate and hence, need to be maintained as a fixed % of sales. FA also needs to infused as % of additional sales every year
Cost of debt, interest payment etc. are not provided. Hence, these factors are ommited from calculation. Ideally, interest payment impact (net of tax) and capital repayment impact should be accounted.

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