1. A Company passes through three stages: growth, transition and maturity stage. The growth stage is expected to last for 2 years, while the transition stage lasts for 3 years. During the transition stage the growth rate of dividends changes from 18% to 9%. What would be the rate of dividend at the end of the first year of the transition stage? (5 Marks) (November 2010) (M)
How this question is solved ?
2.
|
|
For the year ended March 31, 2014 |
|
Revenues |
` 7,500 Crores |
|
Cost of Goods Sold (COGS) |
` 3,000 Crores |
|
Operating Expenses |
` 2,250 Crores |
|
Capital Expenditure |
` 750 Crores |
|
Depreciation (included in COGS & Operating Expenses) |
` 600 Crores |
During high growth period, revenues & Earnings before Interest & Tax (EBIT) will grow at 20%
p.a. and capital expenditure net of depreciation will grow at 15% p.a. From year 4 onwards,
i.e. normal growth period revenues and EBIT will grow at 8% p.a. and incremental capital expenditure will be offset by the depreciation. During both high growth & normal growth period, net working capital requirement will be 25% of revenues.
The Weighted Average Cost of Capital (WACC) of WXY Ltd. is 15%. Corporate Income Tax rate will be 30%.
Required:
Estimate the value of WXY Ltd. using Free Cash Flows to Firm (FCFF) & WACC methodology. The PVIF @ 15 % for the three years are as below:
|
Year |
t1 |
t2 |
t3 |
|
PVIF |
0.8696 |
0.7561 |
0.6575 |
Answer
Determination of forecasted Free Cash Flow of the Firm (FCFF)
(8 Marks) (May 2014)
(` in crores)
|
|
Yr. 1 |
Yr. 2 |
Yr 3 |
Terminal Year |
|
Revenue |
9000.00 |
10800.00 |
12960.00 |
13996.80 |
|
COGS |
3600.00 |
4320.00 |
5184.00 |
5598.72 |
|
Operating Expenses |
1980.00 |
2376.00 |
2851.20 |
3079.30 |
|
Depreciation |
720.00 |
864.00 |
1036.80 |
1119.74 |
|
EBIT |
2700.00 |
3240.00 |
3888.00 |
4199.04 |
|
Tax @ 30% |
810.00 |
972.00 |
1166.40 |
1259.71 |
|
EAT |
1890.00 |
2268.00 |
2721.60 |
2939.33 |
|
Capital Exp. – Dep. |
172.50 |
198.38 |
228.13 |
- |
|
∆ Working Capital |
375.00 |
450.00 |
540.00 |
259.20 |
|
Free Cash Flow (FCF) |
1342.50 |
1619.62 |
1953.47 |
2680.13 |
how this is computed ?
Thanks in advance
CAclubindia
