Awethu (Pty) Ltd is a manufacturing company that has 31 December as its financial year-end. The...

 

 

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Awethu (Pty) Ltd is a manufacturing company that has 31 December as its financial year-end. The company has 100 000 ordinary shares in issue. A listed company is interested in acquiring a controlling interest in Awethu (Pty) Ltd You are provided with the 20X1 actual financial results as well as projected results from 20x2 to 20x4 as follows: Statement of financial position of Awethu (Pty) Ltd as at 31 December: ASSETS Non-current assets: Property, plant and equipment Other investments Current assets: Inventory Accounts receivable Cash Total Assets EQUITY AND LIABILITIES Shareholders' equity: Ordinary share capital and reserves 10% Preference shares Non-current liabilities: Loan (at 12% per year) Current Liabilities: Accounts payable Accrued expenses Total Equity and Liabilities 20x1 actual R 825 000 410 000 1 235 000 10 000 15 000 50 700 75 700 1 310 700 799 700 200 000 999 700 300 000 10 000 1000 11 000 1 310 700 20x2 projected R 565 000 1 010 000 1575 000 11 000 16 000 30 890 57 890 1632 890 1025 890 200 000 1225 890 396 000 10 000 1000 11 000 1632 890 20X3 projected R 292 500 1 410 000 1 702 500 5 000 14 000 75 139 94 139 1 796 639 1 289 639 200 000 1 489 639 296 000 10 000 1000 11 000 1 796 639 20X4 Projected R 32 500 1910 000 1942 500 1 500 10 000 46 993 58 493 2 000 993 1593 993 200 000 1 793 993 196 000 10 000 1.000 11 000 2 000 993 Statement of profit or loss and other comprehensive income of Awethu (Pty) Ltd for the year-ended: Revenue Cost of sales Gross profit Other income: interest Other income: dividends Other operating expenses Finance costs 20x1 Actual Dividends (paid or payable): - Preference shares - Ordinary shares R 1 000 000 (600 000) 400 000 10 000 10 000 000) (30 (30 000) Profit before tax Income tax expense Profit for the year from continuing operations Loss for the year from discontinued operations Profit for the year The following dividends (actual and projected) are applicable: 360 000 (98 000) 262 000 (10 000) 252 000 20X1 Actual R 20 000 30 000 20x2 Projected R 1 100 000 (660 000) 440 000 20 000 000 20x1 Actual R 100 000 275 000 30 (61 000) (40 000) 389 000 (100 520) 288 480 288 480 20x2 Projected R 20 000 30 000 20x2 Projected 20x3 Projected R 1 210 000 (726 000) 484 000 25 000 R 35 000 (72 100) (30 000) 441 900 (113 932) 327 968 20 000 280 000 327 968 20x3 Projected R 20 000 30 000 Property, plant and equipment: Net investment (purchases) made Depreciation expense for the year 3. You may assume that depreciation is equal to wear and tear (capital or tax) allowances. The following additional information is provided: 1. "Other income" consists of non-operating interest and dividend income arising from the "Other investments in the statement of financial position (SOFP). The carrying amounts of these investments as shown in the SOFP represent their fair values. 20x3 Projected 20X4 Projected 2. The annual net investment in property, plant and equipment and the annual depreciation expense are provided below: R 1331 000 (798 600) 532 400 30 000 R 10 000 282 500 50 000 (93 310) (20 000) 499 090 (125 745) 373 345 373 345 20X4 Projected R 20 000 30 000 20X4 Projected R 30 000 290 000 4. The free cash flow to the firm in 20X4 is expected to grow at 7% per year from 20x5 to perpetuity. 5. The income tax rate for companies is 28%. 6. The market related rate (the required rate of return) for preference shares that are similar to the preference shares shown in the 20X1 statement of financial position is 9%. The preference shares are cumulative and non-redeemable. 7. The market related rate (yield to maturity) for the loan in the 20X1 statement of financial position is 11%. The loan shown in the 20x1 statement of financial position (R300 000) pays interest annually and still has two years to maturity. 8. The firm's target capital structure (debt: preference shares ordinary shares ratio) for the future is 1:1:3. The cost of equity has been estimated to be 13%. 3 9. The portion of the "cash" balance which is required for operations as part of the liquidity and working capital requirements is 1% of revenue. The remaining "cash" balance should be considered as surplus cash (a non-operating asset). The interest received from the working capital cash portion is insignificant (and should therefore be ignored). Required: Calculate the value of ordinary shares of Awethu (Pty) Ltd using the free cash flow to firm valuation method. Awethu (Pty) Ltd is a manufacturing company that has 31 December as its financial year-end. The company has 100 000 ordinary shares in issue. A listed company is interested in acquiring a controlling interest in Awethu (Pty) Ltd You are provided with the 20X1 actual financial results as well as projected results from 20x2 to 20x4 as follows: Statement of financial position of Awethu (Pty) Ltd as at 31 December: ASSETS Non-current assets: Property, plant and equipment Other investments Current assets: Inventory Accounts receivable Cash Total Assets EQUITY AND LIABILITIES Shareholders' equity: Ordinary share capital and reserves 10% Preference shares Non-current liabilities: Loan (at 12% per year) Current Liabilities: Accounts payable Accrued expenses Total Equity and Liabilities 20x1 actual R 825 000 410 000 1 235 000 10 000 15 000 50 700 75 700 1 310 700 799 700 200 000 999 700 300 000 10 000 1000 11 000 1 310 700 20x2 projected R 565 000 1 010 000 1575 000 11 000 16 000 30 890 57 890 1632 890 1025 890 200 000 1225 890 396 000 10 000 1000 11 000 1632 890 20X3 projected R 292 500 1 410 000 1 702 500 5 000 14 000 75 139 94 139 1 796 639 1 289 639 200 000 1 489 639 296 000 10 000 1000 11 000 1 796 639 20X4 Projected R 32 500 1910 000 1942 500 1 500 10 000 46 993 58 493 2 000 993 1593 993 200 000 1 793 993 196 000 10 000 1.000 11 000 2 000 993 Statement of profit or loss and other comprehensive income of Awethu (Pty) Ltd for the year-ended: Revenue Cost of sales Gross profit Other income: interest Other income: dividends Other operating expenses Finance costs 20x1 Actual Dividends (paid or payable): - Preference shares - Ordinary shares R 1 000 000 (600 000) 400 000 10 000 10 000 000) (30 (30 000) Profit before tax Income tax expense Profit for the year from continuing operations Loss for the year from discontinued operations Profit for the year The following dividends (actual and projected) are applicable: 360 000 (98 000) 262 000 (10 000) 252 000 20X1 Actual R 20 000 30 000 20x2 Projected R 1 100 000 (660 000) 440 000 20 000 000 20x1 Actual R 100 000 275 000 30 (61 000) (40 000) 389 000 (100 520) 288 480 288 480 20x2 Projected R 20 000 30 000 20x2 Projected 20x3 Projected R 1 210 000 (726 000) 484 000 25 000 R 35 000 (72 100) (30 000) 441 900 (113 932) 327 968 20 000 280 000 327 968 20x3 Projected R 20 000 30 000 Property, plant and equipment: Net investment (purchases) made Depreciation expense for the year 3. You may assume that depreciation is equal to wear and tear (capital or tax) allowances. The following additional information is provided: 1. "Other income" consists of non-operating interest and dividend income arising from the "Other investments in the statement of financial position (SOFP). The carrying amounts of these investments as shown in the SOFP represent their fair values. 20x3 Projected 20X4 Projected 2. The annual net investment in property, plant and equipment and the annual depreciation expense are provided below: R 1331 000 (798 600) 532 400 30 000 R 10 000 282 500 50 000 (93 310) (20 000) 499 090 (125 745) 373 345 373 345 20X4 Projected R 20 000 30 000 20X4 Projected R 30 000 290 000 4. The free cash flow to the firm in 20X4 is expected to grow at 7% per year from 20x5 to perpetuity. 5. The income tax rate for companies is 28%. 6. The market related rate (the required rate of return) for preference shares that are similar to the preference shares shown in the 20X1 statement of financial position is 9%. The preference shares are cumulative and non-redeemable. 7. The market related rate (yield to maturity) for the loan in the 20X1 statement of financial position is 11%. The loan shown in the 20x1 statement of financial position (R300 000) pays interest annually and still has two years to maturity. 8. The firm's target capital structure (debt: preference shares ordinary shares ratio) for the future is 1:1:3. The cost of equity has been estimated to be 13%. 3 9. The portion of the "cash" balance which is required for operations as part of the liquidity and working capital requirements is 1% of revenue. The remaining "cash" balance should be considered as surplus cash (a non-operating asset). The interest received from the working capital cash portion is insignificant (and should therefore be ignored). Required: Calculate the value of ordinary shares of Awethu (Pty) Ltd using the free cash flow to firm valuation method.

Answer rating: 100% (QA)

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