ABC company (ValueCo) is a private company for which we are provided detailed historical financial information. However, for our illustrative DCF analysis, we assume that no management projections were provided in order to cultivate the ability to develop financial projections with limited information. We do, however, assume that we were provided with basic information on ValueCo's business and operations. We began the projection of ValueCo's FCF by laying out its income statement through EBIT for the three-year historical and LTM periods. We also entered ValueCo's historical capex and working capital data. The historical period provided important perspective for developing defensible Base Case projection period financials.

As the projections indicate, financial analyst expects ABC company's (ValueCo) peers (and, by inference, we expect ValueCo) to continue to experience steady growth in 2017E before gradually declining through 2018E. Beyond 2019E, in the absence of additional company-specific information or guidance, we decreased ValueCo's growth to a sustainable long-term rate of 5% for the remainder of the projection period. Predicted levered beta or adjusted beta of each company taken from latest financial bulletin along their capital structure. It makes possible to estimate the equity beta of a private firm by determining the relevant industry beta and relevering it target's capital structure. Assumptions and basis for future projections as follow,

Assumptions:

a)Projected sale growth in 2017E 7.5% in 2017, 6% in 2018 and then decreasing by 1% thereafter.

b)COGS 60% of sales, will remain constant throughout projection year

c)SG&A 19% of sales, will remain constant throughout projection year

d)D&A 6% of sales, will remain constant throughout projection year

e)Tax Rate 38% of sales, will remain constant throughout projection year

f)Cash & Cash Equivalent and Debt were Rs 500 and Rs 3,000 respectively in the year 2016.

g)DSO 46 days, will remain constant throughout projection year

h)DIH 102.5 days, will remain constant throughout projection year

i)DPO 39 days, will remain constant throughout projection year

j)Prepaid Expenses 5% of sales, will remain constant throughout projection year

k)Accrued Liabilities 8.2% of sales, will remain constant throughout projection year

l)Other current Liabilities 2.9% of sales, will remain constant throughout projection year

m)Capital Expenditure 4.5% of sales, will remain constant throughout projection year

n)Targeted Debt-to-Equity ratio 42.9%

o)Cost of debt 6%

p)Risk-free rate 3.1%

q)Market Risk Premium 6.6%

r)Size premium 1.1%

s)Exit multiple 7.5x

Income Statement

Dec 31

(Rs in Million)

2016

Sales

6900

COGS

4140

GP

2760

SG& A

1310

EBITDA

1450

D & A

414

EBIT

1036

Taxes @ 38%

393.7

EBIAT

642.3

Balance Sheet Data

(Rs in Million) as on Dec 31

2016

Account Receivable

870

Inventories

1163

Prepaid Expenses

348

Total CA

2381

Account Payable

442

Accrued Liabilities

568

Other Current Liabilities

200

Total CL

1210

NWC

1171

Comparable companies unlevered beta, market value of debt and equity and tax rate as follows,

Company

_L

MV of Debt

MV of Equity

Tax rate

Co-A

1.24

4400

19600

38%

Co-B

1.35

6300

11200

38%

Co-C

1.25

3700

10000

38%

Co-D

1.45

4500

8320

38%

Co-E

1.14

2000

4480

38%

Required:

1.Using the information and assumptions above, complete ValueCo's projected income statement 2017-2019 through EBIAT (5-Marks)

2.Using the information and assumptions above, calculate forecasted Account receivables, Inventories, Prepayments, Total Current Assets, Account payable, Accrued liabilities, Other current Liabilities, Total Current Liabilities, Net Working Capital and Changes in Net working capital. (5-Marks)

3.Calculated Unlevered FCF (1-Marks)

4.Compute unlevered Beta (from comparable companies' levered Beta) and relevered Beta by using the mean unlevered beta. (2-Marks)

5.Calculate ValueCo's Debt-to-total capitalization by transforming D/E ratio into equity-to-total capitalization. (1-Marks)

6.Calculate ValueCo's cost-of-equity & after-tax cost of debt and WACC. (1-Marks)

7.Using an exit multiple of 7.5x, calculate the terminal value using the exit multiple method (EMM) of FCF. (2-Marks)

8.Using a mid-year convention and using the terminal value found in (G), calculate the implied perpetuity growth rate (PGM). (3-Marks)

9.Using a perpetuity growth rate in (H), calculate the terminal value using the perpetuity growth method. (2-Marks)

10.Using the terminal value found in (I), calculate the implied exit multiple. (2-Marks)

11.Calculate the present value of FCF for 2017E -2020E, enterprise value and implied equity value. (2-Marks)

12.Explain advantages and disadvantages of DCF analysis. (2-Marks)