'Screws and Wires' is a family owned business in the auto parts industry. The current owner...

 

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'Screws and Wires' is a family owned business in the auto parts industry. The current owner has received an offer for the firm's equity of 10 million and asks you to assess this price as to whether it is acceptable or not. This valuation is to be assessed on the date of January 1st 2018 and you have the following data available (note that this starting date is important: the cashflows of 2018 are part of the valuation): Earnings before tax in 2018 are estimated at 1 million. With positive economic outlook, annual growth rates of 10% are expected for the next two years. From 2021 onwards, there is a conservative forecast of a perpetual earnings before taxes of 1 million per year Depreciation expenses will be equal to 50% of the earnings before taxes. The company has positive working capital which amounts to 400 000. Assume that this working capital position will evolve in the future proportionally with the growth rate of the company. Investment (capital expenditure) will be 500 000 per year. The tax rate on profits will be 30% M The expected equity ratio (equity to total assets) will be 41,75% throughout the period and will be stable. The debt ratio will therefore be : 58,25% The risk free interest rate will be assumed to be 5% per year which is also the interest rate on the debt of Screws and Wires. The market value of the firm's debt amounts to 13,5 million. The return on the equity market portfolio (which you require for the CAPM model to calculate the market premium above the risk free rate) is estimated at 8% and the beta of the company is estimated at 1,5. Questions: Calculate the level of working capital in the company and its evolution and give the change in working capital over the forecast period and for the year 2021 (ie take account of the change in working capital as part of your perpetual calculation). 'Screws and Wires' is a family owned business in the auto parts industry. The current owner has received an offer for the firm's equity of 10 million and asks you to assess this price as to whether it is acceptable or not. This valuation is to be assessed on the date of January 1st 2018 and you have the following data available (note that this starting date is important: the cashflows of 2018 are part of the valuation): Earnings before tax in 2018 are estimated at 1 million. With positive economic outlook, annual growth rates of 10% are expected for the next two years. From 2021 onwards, there is a conservative forecast of a perpetual earnings before taxes of 1 million per year Depreciation expenses will be equal to 50% of the earnings before taxes. The company has positive working capital which amounts to 400 000. Assume that this working capital position will evolve in the future proportionally with the growth rate of the company. Investment (capital expenditure) will be 500 000 per year. The tax rate on profits will be 30% M The expected equity ratio (equity to total assets) will be 41,75% throughout the period and will be stable. The debt ratio will therefore be : 58,25% The risk free interest rate will be assumed to be 5% per year which is also the interest rate on the debt of Screws and Wires. The market value of the firm's debt amounts to 13,5 million. The return on the equity market portfolio (which you require for the CAPM model to calculate the market premium above the risk free rate) is estimated at 8% and the beta of the company is estimated at 1,5. Questions: Calculate the level of working capital in the company and its evolution and give the change in working capital over the forecast period and for the year 2021 (ie take account of the change in working capital as part of your perpetual calculation).

Answer rating: 100% (QA)

Working capital in 2018 is given as 400000 Working capital grows proportionally to earnings grow... View the full answer