Jim is the owner and managing director of Colours Ltd, a company selling eco-friendly paints in Ireland. The company has ten stores around the country and is the dominant player in its marketplace.

Bulldog Paints is an AIM listed UK company. It sells eco-friendly and premium paints, owning 120 stores and operating mainly in the competitive UK market. It has recently undertaken a policy of international expansion.

Bulldog Paints is planning to acquire Colours Ltd in 2020. Bulldog Paints expects to make the following changes after acquisition, with impact on the revenues, costs and assets of Colours Ltd:

• Increase both volume and sales. Forecast revenue growth is 10% annually in 2021 and 2022, 5% annually in 2023 and 2024, from 2025 revenue will be constant at the same level as in 2024.
• Reduce cost of sales. Forecast operating margin (profit before interest and tax/sales) is 5%, raised from the current 2.55%.
• Sell Colours Ltd’s head office premises.

Bulldog Paints estimates that:

• It has to invest $90m in a new truck fleet to improve delivery times.
• Additional fixed capital required 15% of incremental sales. No new investment in fixed assets is needed after year 2024.
• Additional working capital 3% of incremental sales. No new investment in working capital is needed after year 2024.
• The expected redundancy costs are $20m.

Colours Ltd ‘s current head office will be closed and its functions transferred to Bulldog Paints’ head office. The head office property will be disposed of for $100m after any capital gains tax.

• Cost of capital (WACC) 11%.

1. Given expected revenues for 2020 of $2000m, fill the table below.

	2021	2022	2023	2024	2025
Sales
Operating Profit
Corporation Tax (33%)
Additional fixed assets
Additional working capital
Free cash flow (FCF)

2- Compute the present value of free cash flows (FCF)

3 -Compute the value of Colours Ltd to Bulldog Paints