Megabyte plc is a high-tech company experiencing transitional problems. To get through this difficult period, management has decided on a 120m recapitalization. In five years' time, the company should make net profits of 21m, and be valued at 30 times its profits. Assume that the discount rate is 25% and that there will be no cash flows generated for five years.

What is the present value of shareholders' equity?

What is the present value of shareholders' equity if profits of only 14m are expected

in five years?

What do you conclude from the above?

The table below shows the forecasts for Management plc (in millions of ):

Year 1 2 3 4 5

Sales 3960 4080 4200 4326 4458

Cost of goods sold 1782 1794 1806 1860 1917

Marketing costs 870 897 924 996 1026

Administrative costs 396 408 420 432 447

Depreciation amortization 330 315 300 300 300

EBIT (Operating income) 582 666 750 738 768

The company is expecting annual capital expenditure of 300m per year over the next five years; working capital will increase by 50m in years 1 and 2, and stabilise thereafter. The following information is also available:

the company has net debts today of 2250m;

the company's cost of equity is estimated at 10%, and the cost of debt at 6% (before

tax);

financing is split 2/3 equity and 1/3 debt;

the tax rate is 37%;

an increase in inflows of 2% to perpetuity can be expected from year 6.

Work out the value of Management plc using the DCF method.

The mean multiple for the 2014 operating profits of comparable peers is 10, and the mean

2011 P/E is 15. Calculate the equity value of Pixi Spa. Key figures for the company are

set out below.

Millions of

Net debt at 31 December 2013 100

2011e operating profits 60

2011e net profits 32