GeoTech owns and operates heavy mining equipment for major contractors in Brazil. Sales revenues for the...

  

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GeoTech owns and operates heavy mining equipment for major contractors in Brazil. Sales revenues for the latest financial year amounted to $200 million. The following tables present financial and operating data for the company. The annual sales growth rate is expected to decrease to 4% in year 4 and maintain that level in the long run. Years 1-3 operating ratios are expected to remain constant in perpetuity. GeoTech Operating Plan Sales, million Sales growth, % Costs (% of sales) Working capital (% of sales) Net fixed assets (% of sales) Depreciation (% of net fixed assets) Company and Market Data Asset beta (Ba) Debt beta (Bd) Debt-to-value ratio (D/(D+E)) Risk-free rate (rf) Market return (rm) Cost of debt (rd) Tax rate Sales long term growth rate Latest Year 200,0 6,7 65,0 20,0 80,0 12,0 0,8 0,1 0,25 5% 10% 7% 20% 4,0% 8,0 65,0 20,0 80,0 12,0 Forecast 2 7,0 65,0 20,0 80,0 12,0 6,0 65,0 20,0 80,0 12,0 Questions: a) (10 points) Calculate free cash flow for years 1-3. b) (10 points) Calculate the after-tax cost of capital (WACC) c) (10 points) Calculate the horizon value in year 3 d) (10 points) Calculate the company value e) (10 points) The planning department pointed out that the arrival of new players in the industry could hamper GeoTech's profitable growth opportunities by the end of year 3. Under this scenario, GeoTech will not be able to earn returns above the cost of capital on new investments made in year 4 and beyond, i.e., PVGO would vanish after year 3. Calculate the company value under this scenario. GeoTech owns and operates heavy mining equipment for major contractors in Brazil. Sales revenues for the latest financial year amounted to $200 million. The following tables present financial and operating data for the company. The annual sales growth rate is expected to decrease to 4% in year 4 and maintain that level in the long run. Years 1-3 operating ratios are expected to remain constant in perpetuity. GeoTech Operating Plan Sales, million Sales growth, % Costs (% of sales) Working capital (% of sales) Net fixed assets (% of sales) Depreciation (% of net fixed assets) Company and Market Data Asset beta (Ba) Debt beta (Bd) Debt-to-value ratio (D/(D+E)) Risk-free rate (rf) Market return (rm) Cost of debt (rd) Tax rate Sales long term growth rate Latest Year 200,0 6,7 65,0 20,0 80,0 12,0 0,8 0,1 0,25 5% 10% 7% 20% 4,0% 8,0 65,0 20,0 80,0 12,0 Forecast 2 7,0 65,0 20,0 80,0 12,0 6,0 65,0 20,0 80,0 12,0 Questions: a) (10 points) Calculate free cash flow for years 1-3. b) (10 points) Calculate the after-tax cost of capital (WACC) c) (10 points) Calculate the horizon value in year 3 d) (10 points) Calculate the company value e) (10 points) The planning department pointed out that the arrival of new players in the industry could hamper GeoTech's profitable growth opportunities by the end of year 3. Under this scenario, GeoTech will not be able to earn returns above the cost of capital on new investments made in year 4 and beyond, i.e., PVGO would vanish after year 3. Calculate the company value under this scenario.

Answer rating: 100% (QA)

aThe free cash flow for years 13 are as follows FCF1 S1C1W1D1 FCF1 200672012 FCF1 100 FCF2 S2C2W2D2 FCF2 21068521126 FCF2 1069 FCF3 S3C3W3D3 FCF3 2211... View the full answer