QUESTION $2$: VALUATION $(12$ MARKS$)$

Assume you are evaluating the purchase of a small business that has generated R $4$ million $($R$4000000)$ in after$-$tax free cash flow for the past year. On similar$-$risk investment opportunities you can earn $20\%.$ However, because you are a bit uncertain about future cash flows, you decide to estimate the firm's value using several possible assumptions about the growth rate of cash flows.

$($a$)$ What is the firm's value if annual cash flows are expected to stay constant from now to infinity?

$($b$)$ What is the firm's value if annual cash flows are expected to grow at a constant annual rate of $8\%$ from now to infinity?

$($c$)$ What is the firm's value if annual cash flows are expected to grow at an annual rate of $12\%$ for two years, at $10\%$ for two years, followed by a constant rate of $8\%$ from the end of year four to infinity?

$($d$)$ From $($c$)$ above, if the company had R $4$ million in debt, R$2$ million of preferred shares and $300000$ shares selling at R$120$ each, would you rather buy or sell them at the market price? Motivate.

QUESTION $3$: FINANCIAL ASPECTS $(8$ MARKS$)$

$($a$)$ For the past financial year $($up to February $2024)$ Khomotso Corporation had a tax rate of $30\%$ and a price$-$earnings $($P$/$E$)$ ratio of $2.$ It had issued $200000$ shares and had an interest expense of R$500000.$ At year end the share price was R$10.$ What was the earnings before interest and tax $($EBIT$)?$

$($b$)$ The year before $(2023)$ Khomotso also had $200000$ shares in issue, but with an interest expense of R$450000.$ It had sales of R$20$ million, a tax rate of $30\%,$ and a net profit margin of eight percent. What was the firm's times$-$interest$-$eamed ratio for that year?