ABC Companys CFO has provided a long-term forecast for ABC as follows: EBIT Net Income Discount Factor
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Question:
ABC Company’s CFO has provided a long-term forecast for ABC as follows:
EBIT Net Income Discount Factor
2020 $42,000,000 $20,000,000 0.91
2021 $44,000,000 $21,000,000 0.83
2022 $46,000,000 $22,000,000 0.75
2023 $48,000,000 $23,000,000 0.68
2024 $50,000,000 $24,000,000 0.62
Assumptions:
- The growth rate after 2024 is 3%
- XYZ Company uses a 10% weighted average cost of capital (WACC) and a minimum required return on equity of 13.33%
- The tax rate is 50%
- The company pays $2,000,000 a year in interest for all years
- Depreciation is expected to be $5,000,000 per year
- After 2020, new equipment purchases are expected to be $10,000,000 a year
- After 2020, net cash outflow of these two items is ($5,000,000) a year
- See expenditures for 2020 above which is a one-time modernization year
- Net working capital changes are assumed to be ($1,000,000) a year as sales grow
- The terminal value of the company at the end of 2024 is $280,000,000
- The purchase will take place at the beginning of 2020, if accepted
Required:
- Prepare a valuation of ABC Company’s common shares using the free cash flow to the firm method and subtracting debt.
- What is the EBITDA based intrinsic value of ABC Company using 2020 data. Subtract debt to obtain the intrinsic value of the shares.
- What are three (3) assumptions in the valuation calculation you would advise XYZ Company’s CFO to keep in mind in assessing the sensitivity of results of the valuation.
- Do you think the company is a buy, yes or no? Is goodwill a factor in the decision? Given reasons for your answers.
Related Book For
Intermediate Accounting
ISBN: 978-0132162302
1st edition
Authors: Elizabeth A. Gordon, Jana S. Raedy, Alexander J. Sannella
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