The SoftTec Products Company is a successful, small, rapidly growing, closely held corporation. The equity owners are

Question:

The SoftTec Products Company is a successful, small, rapidly growing, closely held corporation. The equity owners are considering selling the firm to an outside buyer and want to estimate the value of the firm. Following is last yearâ€™s income statement (2010) and projected income statements for the next four years (2011â€“2014). Sales are expected to grow at an annual 7 percent rate beginning in 2015 and continuing thereafter.

Selected balance sheet accounts at the end of 2010 were as follows. Net fixed assets were $50,000. The sum of the required cash, accounts receivable, and inventories accounts was $50,000. Accounts payable and accruals totaled $25,000. Each of these balance sheet accounts was expected to grow with sales over time. No changes in interest-bearing debt were projected, and there were no plans to issue additional shares of common stock. There are currently 10,000 shares of common stock outstanding.
Data have been gathered for a comparable publicly traded firm in the same industry that Soft-Tec operates in. The cost of common equity for this other firm, Wakefield Products, was estimated to be 25 percent. SoftTec has survived for a period of years.
Management is not currently contemplating a major financial structure change and believes a single discount rate is appropriate for discounting all cash flows.
A. Project SoftTecâ€™s income statement for 2015.
B. Determine the annual increases in required net working capital and capital expenditures (CAPEX) for SoftTec for the years 2011 to 2015.
C. Project annual operating free cash flows for the years 2011 to 2015.
D. Estimate SoftTecâ€™s terminal value cash flow at the end of 2014.
E. Estimate SoftTecâ€™s equity value in dollars and per share at the end of 2010.
F. SoftTecâ€™s management was wondering what the firmâ€™s equity value (dollar amount and on a per-share basis) would be if the cost of equity capital were only 20 percent. Recalculate the firmâ€™s value using this lower discount rate.
G. Now assume that the $35,000 in long-term debt (and therefore interest expense at 10 percent) is expected to grow with sales.
Recalculate the equity using the original 25 percent discountrate.

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Accounts Payable
Accounts payable (AP) are bills to be paid as part of the normal course of business.This is a standard accounting term, one of the most common liabilities, which normally appears in the balance sheet listing of liabilities. Businesses receive... Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial... Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal...