As an analyst in the valuation team your job is to perform significant financial modeling and analysis. Your company is seeing a new sales strategy that require your input. The strategy will be effective for the upcoming 4 Years. If the company adopts the new strategy, sales will grow at the rate of 15% per year for three years. Other ratios such as: Asset turnover, gross margin, the capital structure and income tax will remain unchanged. However, depreciation would be applicable at 8% of net fixed assets at the starting of the year. Moreover, the target rate of return for the company is 12%. Additional financial information for current year is mentioned below:
Income Statement
|
Sales
|
50,000
|
Gross Margin (15%)
|
7,500
|
Admin., selling and Distribution expenses (7%)
|
3,500
|
Profit before tax
|
10,000
|
Tax (35%)
|
3,500
|
Profit After Taxes
|
6,500
|
Balance Sheet
|
Fixed Assets
|
17,000
|
Current Assets
|
12,000
|
Equity
|
25,000
|
- Determine value of business before adoption of new strategy?
- What will be the incremental value and value of business after adoption of this new strategy?
- Provide detailed comments should the company proceeds with this new strategy or Not?
ANS ( 1 AND 2 part of this Question is already solved in just need 3rd part detailed comment)
1.
Determine value of business before adoption of new strategy
Value of business = PAT/r
= 6500/12%
= 54166.66
2.
|
1
|
2
|
3
|
4
|
Sales
|
57500
|
66125
|
76043.75
|
87450.31
|
Profit After Taxes ( 13% of sales)
|
7475
|
8596.25
|
9885.688
|
11368.54
|
ADD: Depreciation
|
1360
|
8596.25
|
1798.6
|
2068.39
|
Less: Capital Expenditure
|
-3910
|
-4496.5
|
-5170.98
|
-5946.62
|
Less: Increase In Current Asset
|
-1800
|
-2070
|
-2308.5
|
-2737.58
|
Free Cash Flow
|
3125
|
3594
|
4133
|
4753
|
Value under New Strategy
=3125(1+.12)1+3594(1+.12)2+4133(1+.12)3+4753(1+.12)4+4753(1+.12)5+….
=3125/(1+.12)1+3594/(1+.12)2+4133/(1+.12)3+1/(1.12)3×[4753/]
=2790.1786+2865.1148+2941.7878+28192.4293
=36789.5105
Working Data
Calculate Depreciation and Purchase of Fixed Asset
|
0
|
1
|
2
|
3
|
4
|
Sales
|
50000
|
57500
|
66125
|
76043.75
|
87450.3125
|
Fixed Asset
|
17000
|
19550
|
22482.5
|
25854.88
|
29733.1063
|
Ratio
|
34%
|
34%
|
34%
|
34%
|
34%
|
Calculate Increase In Current Assets:
Incremental Value
=Value under New Strategy – Value Under Old Strategy
=36789.5108 – 54166.6667
=17377.1562
3. ( I NEED DETAILED COMMENTS OF C PART)
Extracted text: Calculate increase in current assets: Year 1 2 3 4 Sales 50,000 57,500 66,125 76,043.75 87,450.31 Current Assets Increase in Current 12,000 13,800 15,870 18,250.50 20,988.08 1,800 2,070 2,380.50 2,737.58 Assets Incremental value = Value under new strategy - Value under old strategy = 36,789.5105 - 54,166.6667 = - 17,377.1562 3. Provide detailed comments should the company proceeds with this new strategy or Not? New strategy should not be adopted as incremental value is negative.