As an analyst in the valuation team your job is to perform significant financial modeling and analysis. Your company is seeing a new sales strategy that require your input. The strategy will be effective for the upcoming 4 Years. If the company adopts the new strategy, sales will grow at the rate of 15% per year for three years. Other ratios such as: Asset turnover, gross margin, the capital structure and income tax will remain unchanged. However, depreciation would be applicable at 8% of net fixed assets at the starting of the year. Moreover, the target rate of return for the company is 12%. Additional financial information for current year is mentioned below:

 

  Income Statement 

   Sales

 50,000

   Gross Margin (15%)

 7,500

   Admin., selling and Distribution expenses (7%)

 3,500

   Profit before tax

 10,000

   Tax (35%)

 3,500

   Profit After Taxes

 6,500

   Balance Sheet 

   Fixed Assets

 17,000

   Current Assets

 12,000

   Equity

 25,000

    

A) Determine value of business before adoption of new strategy?                         

B) What will be the incremental value and value of business after adoption of this new strategy?  

C) Provide detailed comments should the company proceeds with this new strategy or Not? 

Answer rating: 100% (QA)

A Determine the value of the business before the adoption of the new strategy Step 1 Calculate the expected free cash flows for each of the next three ... View the full answer