QUESTION 1 (40 marks) BACKGROUND Mr Darren Scott is a South African resident, born in Durban and who is presently residing in Cape Town. In 2015, Darren founded DS Furniture (Pty) Ltd (DS) which trades as a manufacturer and retailer of furniture in Cape Town. Darren maintains a 100% equity shareholding in DS and the company is funded entirely by equity. DS manufactures specialised furniture products for corporate offices in South Africa. By 2017, DS had established multiple branches in South Africa and had achieved robust financial performance in terms of profitability and solvency. During 2019 Russells Furniture (one of the largest furniture companies in South Africa) began observing the competitive market share of DS and developed an interest in acquiring the business. In December 2019 Russells entered into negotiations with Darren Scott to acquire a 51% shareholding in DS. Darren has requested you to value a 51% shareholding in DS as at 28 February 2020 so he can appropriately evaluate any offer that Russells present.

FINANCIAL INFORMATION Due to the erratic nature of the furniture business the company is only able to estimate cash flows for three years beginning on 1 March 2020. After the 3-year period the cash flows are expected to remain the same as the financial year ending 28 February 2023. DS Ltd has provided the following financial projection of their 2021 financial year (ending 28 February 2021): The operating profit before interest and tax is projected to be R250,000; Working capital requirements are R40,000; Depreciation is expected to be R80,000 while amortization is projected to be R7,000 and impairment is estimated at R3,000; There are no other non-cash items. Cash flows will grow by 12% per year after the 2021 financial year until 28 February 2023. Cash flows are then expected to remain the same indefinitely after the 2023 financial year.

OTHER INFORMATION You may assume that the South African furniture industrys required rate of return for shareholders is 15%. During a discussion with Darren Scott the following additional information which was specific to DS was identified: DS has low financial risk. The furniture industry in South Africa is not particularly competitive. DS has had a high staff turnover as several members of the management team are head hunted by other furniture stores. The nature of products at DS is non-complex. DS is not sensitive to changes in technology.

REQUIRED Prepare a valuation report for Mr Darren Scotts 51% shareholding in DS as at 28 February 2020. Show all workings. Round all present value factors to 3 decimals where applicable.