Before moving on to evaluating the company, let's modify the balance sheet to simplify our further calculations.
Question:
Before moving on to evaluating the company, let's modify the balance sheet to simplify our further calculations. Create a balance sheet showing capital employed on the left and invested capital on the right side. The original balance sheet has been attached below the question. (5 marks)
BALANCE SHEET | |||||
Assets (in Lakhs) | Liabilities (in Lakhs) | ||||
Current Assets | Current Liabilities | ||||
Cash | 3042 | Loans payable | 17258 | ||
Accounts receievables | 24701 | Accounts payable | 37268 | ||
Supplies | 18958 | Taxes payable | 2612 | ||
Other current assets | 1272 | ||||
Non-Current Assets | Non-Current liabilities | ||||
Long-term receivables | 40790 | Long term debt | 40810 | ||
Other assets | 10332 | Deferred income tax liabilities | 27244 | ||
Plant and equipment | 247101 | Other long term obligations | 22476 | ||
Equity | |||||
Stocks | 191794 | ||||
Other income | 6734 | ||||
Total | 346196 | Total | 346196 |
Now, consider a case that you buy the Green Energy Company but due to an unexpected liability, you are unable to go into production. This would mean that there is no extra benefit that the company would be able to generate post-acquisition. How much would you be willing to pay for the company in this case? Show the calculations in the submission document. (3 marks)
Assumptions:
- Consider that you would be able to utilize all the plants and equipment. The account receivables are from the customers, with a possibility of collecting 90% of the amount
Now, consider the original case of when you were planning to buy the company. You would be able to utilise all the company resources after acquiring the company. So, you ask your team to evaluate the company and the possible changes that can be done to increase sales. After a week, your team present you with these suggestions and assumptions that will be used for valuing the company.
- As a conservative survey, the researchers have only assumed a growth scenario for the next 4 years. From year 5 onwards, the values remain constant
- Revamping the machinery to increase the output would result in a 10% reduction in production cost, along with a 5% reduction in administrative costs. This would cost Rs 2000 Lakhs which will be depreciated over 4 years
- This revamp would help in increasing the revenue by 10% each year for the next 4 years and then it becomes a constant
- The downside to the revamp would be an increase in the time it takes for the product to be ready. Although it does take only a few extra minutes, the quantity of the product translates to a roughly 5% increase in the working operating capital
- The cost of goods and tax rate would be a constant percentage of the sales revenue
- The discount rate has been assumed to be 10%
Utilize these assumptions to calculate:
- The free cash flows for the Years 0-5 (10 marks)
- The terminal value (2 marks)
The relevant data of the income sheet has been attached here for your reference.
INCOME STATEMENT (in Lakhs) | |
Revenue | 290212 |
Cost of goods sold | -191586 |
Production | -36682 |
Administrative expenses | -11480 |
Depreciation | -18745 |
Operating income | 31719 |
Interest | -766 |
Tax | -10113 |
Net Income | 20840 |
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta