Question

1 question (70%) The Bergeson Corporation sold its shares to the general public in 2019. The firm's 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 firm's investment banker conducted a study of the firm's 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 Bergeson's invested capital in year 0 is $9 818,18, what is the market value added (MVA) for Bergeson? c. What is the Shareholder's 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

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.