TELECORP (“TELECORP”) Limited is a multinational company in the Telecommunications sector. It has grown organically over the last 8 years. TELECORP feels it has exhausted organic growth and is now reviewing a strategic plan to acquire a number of companies to achieve synergies and to meet their growth forecasts. Telecorp has a policy of valuing the shares in a company using the free cash flows to equity model.

After much consideration TELECORP identified DIGICALL a small Telecommunications company as an acquisition opportunity. TELECORP and DIGICALL both operate in the same industry.

You have been provided with the extracts of the financial statements of DIGICALL for last year (2020).

Statement of Profit and Loss and Other Comprehensive Income of DIGICALL for 2020

€’000

Profit before interest and Tax 537

Loan Interest (108)

Profit before tax 429

Tax (86)

Profit after Tax 343

Extract from the Statement of Financial Position of DIGICALL for 2020

€’000

Non-Current Assets 1,825

Additions 88

1,913

Accumulated Depreciation (497)

1,416

Current Assets 485

Long term loan (1,200)

Net Assets 701

Notes:

The following projections have been made for the next three (2021 to 2023) years:

• Profit before interest and tax will grow at a rate of 7% per annum
• Depreciation is charged at 12% per annum on the year-end non-current asset balance before accumulated depreciation. Depreciation of €195,000 has been charged in the above calculation of profit before interest and tax. It can be assumed that depreciation is allowable for tax purposes.
• The company will not dispose of any of its non-current assets in the next three years but will increase its investment in non-current assets by 20% per annum. In the current year the investment in non-current assets was €92,000.
• The company pays fixed interest on its outstanding loan of 9% per annum.
• The level of the loan of €1,300,000 will be maintained for the coming years.
• The investment in working capital (equivalent to current assets) is expected to increase in line with growth in profit before interest and tax.
• After the three year planning horizon it is estimated that the cashflows of DIGICALL will grow at a rate of 6% per annum indefinitely.
• The cost of equity is 10% per annum.
• The tax rate is 20%.

REQUIREMENT:

Prepare a report and advise the following;

1. Estimate the market value of equity of DIGICALL using the free cash flow model to equity model.

2. Advise TELECORP of the uncertainties and assumptions of using the free cash flow to equity model for valuation purposes.

(c) Evaluate two ways in which TELECORP can achieve growth organically?

(d) Critically review the synergies that could be achieved by Telecorp from the acquisition Of Digicall.

(e) Analyse three important factors that will be required to result in successful acquisition.

(f) In your opinion what are the main factors that could lead to the failure of the acquisition?

Answer rating: 100% (QA)

1 Estimate the market value of equity of DIGICALL using the free cash flow model to equity model The market value of equity is the present value of al... View the full answer