QUESTION ONE

DR T.J MABVURE
 a. Discuss the three methods of valuation, namely; Discounted Cash Flow Valuation,
Relative
Valuation, and contingency Valuation. (5 Marks)

SOLUTION
• Students to indicate the DCF approach looks at discounting all the future
expected cash Flows. (2 Marks)
• The Relative Valuation is done to compare the firm with other firms in the
line of business. (2 Marks)
• Contingency Valuation looks at valuation of derivatives (1 Mark)
b. ‘Equity valuation using present value models involves greater uncertainty as compared to
Bond Valuation’. Discuss. (15 Marks)

SOLUTION
Equity valuation using present value models is more uncertain than the bond
valuation model because there is a lot of forecasting of cash flows. The growth rate
also involves certain. The future is uncertain and therefore everything is based on
forecast. The terminal value also greatly affects the value of equity as it has a great
weight.

(7.5 Marks)
The Bond Valuation is more certain as the Maturity Value is known. It is the
amount that was originally borrowed. This is also known as the principal amount.
The coupon rate which is used to calculate the interest amount is also known from
the beginning.

(7.5 Marks)

c. ‘The Free cash flow to the Equity holders is the cash flows after meeting the
reinvestments needs as well as the working capital needs of the company’. Discuss.
(5 Marks)
SOLUTION
The Free cash flow to equity Holders are cash flows that are attributable to the
equity holders. These are the residual cash flows after meeting the payments to the
government through taxes, payments to the debt holders through interest, payments
to the preferred shareholders through preferred dividends. The residual cash flow
flow is then also committed to Capital Expenditures and working capital needs of
the firm. What remains is then called the Free Cash Flow to Equity holders (FCFE).
The FCFE is then paid out as dividends in its entirety or just a fraction of it is paid
out as dividends and the other amount is retained and then forms part of equity. (5
Marks)

d. Explain why a firm is concerned with non-cash working capital only when calculating the
cash-flows to equity or the cash-flows to the firm? (5 Marks)

DR T.J MABVURE
 SOLUTION
The non-Cash working Capital is the trade receivables as well as and inventory. The
increase in these current assets decrease cash flows and the decrease in these current
assets increase cash flows. Therefore that management of these current assets either
increase or decrease the cash flows. (5 Marks)

e. A firm had $30 million of debt outstanding and $60 million in market Value of Equity.
The Debt ratio is assumed to be stable, and there is no attempt to change it. The following
information is available:

2018(Reported) 2019(Projected)
$ $
Net Income 500 700
Depreciation 300 325
Capital Expenditure 400 550
Working Capital (2017=250) 150 -
Sales 1800 2300

Working capital in 2019 is projected to be at the same percentage of sales as in 2018

Required
Calculate the Free Cash Flow to Equity for 2018 and 2019 (10 Marks)

SOLUTION
(1 Mark)
Working Capital as a percentage of sales in 2018: (1 Mark)

Working Capital as a percentage of sales in 2018:𝟖. 𝟑𝟑% ∗ 𝟐𝟑𝟎𝟎 = $𝟏𝟗𝟏. 𝟔𝟕 (1 Mark)

2018 2019
Net Income 500 (1/2 Mark) 700 (1/2 Mark)
Less: Capex-Dep(1-d) 66.7 (1 Mark) 150.075 (1 Mark)
Less: WC (1-d) (66.7) (2 Mark) 27.79389 (1 Mark)
FCFE 500 (1/2 Mark) 522.13111 (1/2 Mark)

QUESTION TWO

DR T.J MABVURE
 A firm is expecting a ten `year period of high growth after which the growth rate will
normalise in line with the growth rate of the economy.

The following data pertains to the high growth period:

$

Net Income after Tax 2 500 000

Book Value of Equity 10 000 000
Dividends are going to be 20% of the Net Income after tax
Systematic Risk 1.7
Return on the Stock Market 26%
Return on the money market 17%

Stable Growth Phase

Net Income after Tax 5 000 000
Book Value of Equity 25 000 000
Expected Growth Rate in earnings and Dividends 10%
Non-diversifiable Risk 1.1
Return on the market for short term securities 15%
Return on the market for long term securities 24%

Required
Calculate the P/E Multiple and commend on your findings if the other companies in the same
industry have an average P/E Multiple of five (5) times. (10 marks)

SOLUTION

(1/2 Mark)

Retention Ratio=1-0.20=0.80

Payout Ratio= 20%

𝒌𝒆 = 𝑹𝒇 + 𝜷(𝑹𝒎 − 𝑹𝒇) = 𝟏𝟕 + 𝟏. 𝟕(𝟐𝟔 − 𝟏𝟕) = 𝟑𝟐. 𝟑% (1/2 Mark)

𝒈𝒏 = 𝟏𝟎%

(1/2 Mark)
𝑲𝒆𝒏 = 𝑹𝒇 + 𝜷(𝑹𝒎 − 𝑹𝒇)
𝑲𝒆𝒏 = 𝟏𝟓 + 𝟏. 𝟏(𝟐𝟒 − 𝟏𝟓) = 𝟐𝟒. 𝟗% (1/2 Mark)

DR T.J MABVURE
 𝒏= (𝟏 − 𝑷𝒂𝒚𝒐𝒖𝒕) ∗ 𝑹𝑶𝑬

𝒏= 𝑹𝑶𝑬 − 𝑹𝑶𝑬 ∗ 𝑷𝒂𝒚𝒐𝒖𝒕 𝑹𝒂𝒕𝒊𝒐𝒏

(1/2 Mark)
(1/2 Mark)

(1/2 Mark)

Marks)

(1 Mark)

(3 Marks)
𝑷𝑬 = 𝟏. 𝟐𝟏𝟓𝟖𝟐𝟓𝟑𝟗𝟗 + 𝟏. 𝟑𝟗𝟏𝟐𝟎𝟐𝟕𝟖𝟗 = 𝟐. 𝟔𝟎𝟕𝟎𝟐𝟖𝟏𝟖𝟖 𝑻𝒊𝒎𝒆𝒔

Comment
This firm is seriously undervalued against similar firms in the industry. (1 Mark)
QUESTION THREE

IOI Plaza Plc has the following information

Current Information $
Net Income after tax 30000
Earnings per share 13 000
Operating Earnings 37 000
Capital expenditure per share 15 000
Depreciation per share 8 000
Revenue per share 35 000
Working Capital as a percentage of Revenues 20%

Inputs projections for the high growth period

DR T.J MABVURE
 i. The high growth period will last for four years and during this period the Return on
Equity is expected to be 60%. ii. The Payout ratio will be 10%. iii. Capital Expenditure,
Depreciation and Revenues will grow at the same ratio as earnings. iv. Working capital will
be maintained at 20% of revenues.
v. The debt ratio will be 8% and the following market parameters will apply. vi.
Systematic Risk= 1.5, Money Market Rate=15%, Risk Premium=6%
Inputs for the transition period
i. Length of period will be four (4) years
ii. The growth rate in earnings and dividends will decline to 20% in year eight (8)
linearly.
iii. Capital expenditure will grow at 30% and Depreciation will grow at 46% per annum.
iv. Revenues will now be growing at 35%.
v. Working Capital will decline linearly to 10% of revenues in year eight.
vi. The debt ratio will increase to 15%
vii. The other market parameters will remain the same but the market risk will decline to
1.0 in year eight linearly.

Inputs for the Stable period

i. Earnings will grow at 10% in perpetuity.
ii. Capital expenditures will be exactly offset by depreciation. iii.
Revenues will grow at 10%.
iv. Working capital be 6% of revenues
v. The debt ratio will increase to 20%. vi.
The systematic risk will decrease to 0.8
vii. The other parameters will remain the same.

Required
i. Calculate the value per share of Penang Plc and comment on the significance of your
answer. (25 Marks) SOLUTION

High Growth Phase

𝒈 = 𝒃 ∗ 𝑹𝑶𝑬
𝒈 = (𝟏 − 𝑷𝒂𝒚𝒐𝒖𝒕 𝑹𝒂𝒕𝒊𝒐) ∗ 𝑹𝑶𝑬
𝒈 = (𝟏 − 𝟎. 𝟏𝟎) ∗ 𝟔𝟎 = 𝟓𝟒% (1/2 Mark)

𝑲𝒆 = 𝑹𝒇 + 𝜷(𝑹𝒎 − 𝑹𝒇) = 𝟏𝟓 + 𝟏. (𝟔) = 𝟐𝟒% (1/2 Mark)

0 1 2 3 4
CAPEX (g=54%) 15,000 23100 35574 54783.96 84367.3
DEP (g=54%) 8,000 12320 18972.8 29218.11 44995.89
REVENUES (g=54%) 35,000 53900 83006 127829.2 196857
WC(20% Of
Revenues) 7000 10780 16601.2 25565.85 39371.41
∆WC 3780 5821.2 8964.648 13805.56

EPS 13,000 20020 30830.8 47479.43 73118.33

Less(CAPEX-DEP)(1-d) 9917.6 15273.1 23520.58 36221.69

DR T.J MABVURE
 Less WC(1-d) 3477.6 5355.504 8247.476 12701.11
FCFE 6624.8 10202.19 15711.38 24195.52
(4 Mark)

(2 Marks)

Transition Growth Phase

(1/2 Mark)

(1/2 Mark)

(1/2 Mark)

4 5 6 7 8
Growth Rate 54 45.5 37 28.5 20
Beta Coefficient 1.5 1.375 1.25 1.125 1
Working Capital 20 17.5 15 12.5 10

(1 Mark)

𝑲𝒆 = 𝑹𝒇 + 𝜷(𝑹𝒎 − 𝑹𝒇)
𝑲𝒆𝒀𝒆𝒂𝒓𝟓 = 𝟏𝟓 + 𝟏. 𝟑𝟕𝟓(𝟔) = 𝟐𝟑. 𝟐𝟓% (1/2 Mark) 𝑲𝒆𝒀𝒆𝒂𝒓𝟔 = 𝟏𝟓 + 𝟏. 𝟐𝟓(𝟔)
= 𝟐𝟐. 𝟓% (1/2 Mark) 𝑲𝒆𝒀𝒆𝒂𝒓𝟕 = 𝟏𝟓 + 𝟏. 𝟏𝟐𝟓(𝟔) = 𝟐𝟏. 𝟕𝟓% (1/2 Mark)
𝑲𝒆𝒀𝒆𝒂𝒓𝟖 = 𝟏𝟓 + (𝟔) = 𝟐𝟏% (1/2 Mark)

4 5 6 7 8
CAPEX (g=30%) 84367.3 109677.5 142580.7 185355 240961.4
DEP (g=46%) 44995.89 65694 95913.24 140033.3 204448.7
REVENUES (g=35%) 196857 265757 358771.9 484342.1 653861.9

DR T.J MABVURE
 WC(% Of Revenues Varies) 39371.41 46507.47 53815.79 60542.76 65386.19
∆WC 13805.56 7136.067 7308.317 6726.974 4843.421

EPS 73118.33 106387.2 145750.4 187289.3 224747.1

Less(CAPEX-DEP)(1-d) 36221.69 37385.96 39667.37 38523.38 31035.85
Less WC(1-d) 12701.11 6065.657 6212.07 5717.928 4116.908
FCFE 24195.52 62935.54 99870.98 143048 189594.4

(4 Marks)

(2 Marks)

Stable Period
𝑲𝒆 = 𝟏𝟓 + 𝟎. 𝟖(𝟔) = 𝟏𝟗. 𝟖% (1/2 Mark)

8 9
REVENUES (g=10%) 653861.9 719248
WC(6% Of Revenues ) 65386.19 43154.88
∆WC 4843.421 -22231.3

EPS(g=10% 224747.1 247221.9

Less ∆WC(1-d) 4116.908 -17785
FCFE 265006.9
(2 Marks)

(2 Marks)

DR T.J MABVURE
 (2 Marks)

𝑷𝟎 = $𝟑𝟎𝟒𝟓𝟐. 𝟐𝟎𝟒𝟔 + $𝟏𝟏𝟖𝟓𝟒𝟕. 𝟔𝟐𝟑𝟕 + $𝟓𝟏𝟒𝟐𝟒𝟏. 𝟑𝟔𝟓𝟗 = $𝟔𝟔𝟑𝟐𝟒𝟏. 𝟏𝟗𝟒𝟐

(2 Marks)
ii. ‘Equity valuation is also affected by; the economic situation in which the firm is
operating in; business factors peculiar to the firm and industry; technological factors;
and financial factors’. Discuss. (5 marks).

SOLUTION

Students to discuss how the development of the economy affects equity Valuation,
as well as business firm specific (industry specific), technological factors, and
financial factors.

(5 Marks)

QUESTION FOUR

There are suggestions in a board meeting of a firm that sales should increase by 15% without
fail. However the board has not yet agreed as some feel the rate is too low and some feel it’s
too high. The following current information is provided for the firm.

INCOME STATEMENT
$
Sales 30000
Operating expenses (27160)
Operating earnings (EBIT) 2840
Interest (880)
EBT 1960
Tax (40%) (784)
Net income 1176
Preferred dividends (40) Net income to
ordinary 1136
Dividend to ordinary (580)
Retained earnings 556

DR T.J MABVURE
 STATEMENT OF FINANCIAL POSITION
$
Cash 100
Accounts receivables 3750
Inventory 6150
Current assets 10000
Plant and equipment 10000
20000

Accounts payables 600

Notes payable 1100
Accruals 1400
Long term loan 7540
10640
Preferred Capital 400
Ordinary share capital 1300
Retained earnings 7660
Equity and liabilities 20000

The expansion of the firm needs funding and unfortunately the firm is no longer able to raise
debt capital because it has already reached the ceiling as per existing bond covenants, as well
as the desired level of leverage for the firm. The firm’s ordinary shareholders are also
reluctant to raise more equity as it will lead to the dilution of shares. It has been agreed that
the firm will have to grow by a growth rate that will not put pressure on the firm.

Required
As the finance manager of the firm you have been mandated to calculate the growth rate that
will not require the firm to look for external funding in the form of debt and equity, and
report in the next board meeting that will hold in a week’s time. (20 Marks)

SOLUTION

(2 Marks)
(2 Marks)

(2 Marks)

(2 Marks)

DR T.J MABVURE
 𝑨𝑭𝑵 = (𝑨∗⁄𝑺)∆𝑺 − (𝑳∗⁄𝑺)∆𝑺 − 𝑴𝑺𝟏 (𝟏 − 𝒅𝒊𝒗) (1 Mark)
(𝑨∗⁄𝑺)∆𝑺 − (𝑳∗⁄𝑺)∆𝑺 − 𝑴𝑺𝟏 (𝟏 − 𝒅𝒊𝒗) = 𝟎 (1 Mark)
(𝑨∗⁄𝑺)∆𝑺 − (𝑳∗⁄𝑺)∆𝑺 − 𝑴𝑺𝟏 (𝟏 − 𝒅𝒊𝒗) = 𝟎
(𝑨∗⁄𝑺)𝒈𝑺𝟎 − (𝑳∗⁄𝑺)𝒈𝑺𝟎 − 𝑴𝑺𝟏(𝟏 − 𝒅) = 𝟎
(1 Mark)
𝟎. 𝟔𝟔𝟔𝟔𝟔𝟕𝒈𝑺𝟎 − 𝟎. 𝟎𝟔𝟔𝟔𝟕𝒈𝑺𝟎 − 𝟎. 𝟎𝟎𝟑𝟗𝟐(𝑺𝟎 + 𝒈𝑺𝟎)(𝟏 − 𝟎. 𝟓𝟏𝟎𝟓𝟔𝟑𝟑𝟖)=0 (1 Mark)
𝟎. 𝟔𝟔𝟔𝟔𝟔𝟕𝒈𝟑𝟎𝟎𝟎𝟎 − 𝟎. 𝟎𝟔𝟔𝟔𝟕𝒈𝟑𝟎𝟎𝟎𝟎 − 𝟎. 𝟎𝟑𝟗𝟐(𝟑𝟎𝟎𝟎𝟎 + 𝒈𝟑𝟎𝟎𝟎𝟎)(𝟏
− 𝟎. 𝟓𝟏𝟎𝟓𝟔𝟑𝟑𝟖)=0

(1 Mark)
𝟎. 𝟔𝟔𝟔𝟔𝟔𝟕𝒈𝟑𝟎𝟎𝟎𝟎 − 𝟎. 𝟎𝟔𝟔𝟔𝟕𝒈𝟑𝟎𝟎𝟎𝟎 − (𝟏𝟏𝟕𝟔 + 𝒈𝟏𝟏𝟕𝟔)(𝟏 − 𝟎. 𝟓𝟏𝟎𝟓𝟔𝟑𝟑𝟖)=0
𝟎. 𝟔𝟔𝟔𝟔𝟔𝟕𝒈𝟑𝟎𝟎𝟎𝟎 − 𝟎. 𝟎𝟔𝟔𝟔𝟕𝒈𝟑𝟎𝟎𝟎𝟎 − (𝟏𝟏𝟕𝟔 + 𝒈𝟏𝟏𝟕𝟔)(𝟏 − 𝟎. 𝟓𝟏𝟎𝟓𝟔𝟑𝟑𝟖)=0
𝟎. 𝟔𝟔𝟔𝟔𝟔𝟕𝒈𝟑𝟎𝟎𝟎𝟎 − 𝟎. 𝟎𝟔𝟔𝟔𝟕𝒈𝟑𝟎𝟎𝟎𝟎 − (𝟓𝟕𝟓. 𝟓𝟕𝟕𝟒𝟔𝟓𝟏 + 𝒈𝟓𝟕𝟓. 𝟓𝟕𝟕𝟒𝟔𝟓𝟏)
𝟐𝟎𝟎𝟎𝟎𝒈 − 𝟐𝟎𝟎𝟎𝒈 − (𝟓𝟕𝟓. 𝟓𝟕𝟕𝟒𝟔𝟓𝟏 + 𝒈𝟓𝟕𝟓. 𝟓𝟕𝟕𝟒𝟔𝟓𝟏)=0 (1 Mark)
𝟐𝟎𝟎𝟎𝟎𝒈 − 𝟐𝟎𝟎𝟎𝒈 − 𝒈𝟓𝟕𝟓. 𝟓𝟕𝟕𝟒𝟔𝟓𝟏=𝟓𝟕𝟓. 𝟓𝟕𝟕𝟒𝟔𝟓𝟏
(1
Mark)
𝟏𝟕𝟒𝟐𝟒. 𝟒𝟐𝟐𝟓𝟑𝐠 = 𝟓𝟕𝟓. 𝟓𝟕𝟕𝟒𝟔𝟓𝟏 (1 Mark)

(1 Mark)

(1 Mark)
The growth rate that will make the company live within its means without borrowing
from outside or raising finance through new Equity is 0.32% (2 Marks)

END OF EXAMINATION PAPER!!!!

DR T.J MABVURE
 QUESTION ONE

a. ‘A firm which is still at its lower levels of growth may use Venture capital and Angel
capital, as its equity financing and option based financing as its debt financing’. Discuss
these forms of

Capital that make up the capital structure of this firm. (10 Marks)
ANSWER
A business angel (also known as an angel Investor, informal investor, angel funder, private
investor, or seed investor) is a private investor that invests part of his or her own wealth and
time in early-stage innovative companies. This is an affluent individual who provides capital
for a business start-up, usually in exchange for convertible debt or ownership equity. A small
but increasing number of angel investors invest online through equity crowd-funding or
organize themselves into angel groups or angel networks to share research and pool their
investment capital, as well as to provide advice to their portfolio companies. Apart from
getting a good return, business angels expect to have fun. It is estimated that angel investment
amounts to three times venture capital. Angel investors are often retired entrepreneurs or
executives, who may be interested in angel investing for reasons that go beyond pure
monetary return. These include wanting to keep abreast of current developments in a
particular business arena, mentoring another generation of entrepreneurs, and making use of
their experience and networks on a less than full-time basis. In addition to funds, angel
investors can often provide valuable management advice and important contacts. Angels
typically invest their own funds, unlike venture capitalists who manage the pooled money of
others in a professionally managed fund.

Venture is a type of private equity. It’s a form of financing that is provided by firms or funds
to small, early-stage, emerging firms that are deemed to have high growth potential, or which
have demonstrated high growth (in terms of number of employees, annual revenue, or both).
Venture capital firms or funds invest in these early-stage companies in exchange for equity–
an ownership stake–in the companies they invest in. Venture capitalists take on the risk of
financing risky start-ups in the hopes that some of the firms they support will become
successful. Venture capital is a way of corporate financing by which a financial investor takes
participation in the capital of a new or young private company in exchange for cash and
strategic advice. Venture capital investors look for fast-growing companies with low leverage
capacity and high-performing management teams. Their main objective is to make a profit by
selling the stake in the company in the medium term. They expect profitability higher than the
market to compensate for the increased risk of investing in young ventures.

On option based financing, these cater for the debt capital that is given in the early ages of a
firm. This is so because the cash flows will still be so low, such that plain vanilla bonds won’t

DR T.J MABVURE
 do as they are expensive to the firm. The option based financing are in the form of convertible
bonds, bonds with warrants, callable bonds, and puttable bonds.
(10 Marks)

b. Corporates have many arms of strategies to enable them to accomplish their mandate and
achieve their main goal of maximising the shareholder value. These strategies are;
Marketing, Human resources, Production, and Financial. Which strategy is the finance
manager/director concerned with, and what are the issues that the financial manager is
seized with at each and every growth level of the firm? (10 Marks).
ANSWER

The finance manager/director concerned with the financial strategy. Below are the matters
that the financial manager is seized with at each level of the PLC.

Introductory stage
 Net cash flows will be negative or very low because revenues are still low and there
are outflows in concept development

 Dividends are nil because profits still low and cash flows are negative. Retention ratio
is 100% in order to gain market share in the growing market.

 P/E ratio will be very high. Market perception that the company will do well in the
future are very high. Price per share relative to earnings per share is high.

 Total return(Dividend yield plus capital gain yield)

 The investors are the promoters of the product concept and they are the sponsors. The
investors are venture capitalists using venture capital (venture capitalists have
different portfolios in different SBUs, i.e invest in a controlling stake. They will be
looking for capital gains and not dividends. They sell their equity holdings and as
soon as the company grows they pull out. Angel capitalists are an alternative to
venture capitalists.

 Financing structure will be all equity finance. Therefore the gearing ratio will be Nil.
The Company cannot sustain loan obligations as they come due.

 Operating risk (business risk) will be very high so the required rate of return by debt
holders will be high and cannot be sustained. Total risk=Operating risk+Financail
risk), so financial risk has to be maintained at low levels.

Growth Stage

DR T.J MABVURE
  Still fighting competitors if the barriers to entry are very low.
 Net cash flows are still low because of the heavy expenditures incorporated in
strengthening the brand.

 Dividends payments are very low

 P/E ratio still very high
 Capital gains being sought for, other than dividends
 Gearing low because at this stage the business risk is still relatively high, that’s why
there is need for reducing financial risk by reducing borrowings

 Equity financing, but changed from venture because the company will be listed to
facilitate a new share issue (IPO) for expansion of the company. Equity is now
shareholders equity and the venture capitalists will pull out. At listing there will be a
price which will determine the price at which the venture will sell their share. Private
placements (approaching institutional investors such as the MIPF, PTC, NSSA, OLD
MUTUAL, etc) would also be considered when the company does not want to list.

 Option based financing; financing with imbedded options such as convertible

debentures, convertible bonds will be considered. This are issued at a lower cost than
plain vanilla bonds. These will be converted after a period of time agreeable. The
option to convert is not obligatory, only exercised when it’s profitable to do so. Also
there can be debentures with warrants attached, i.e. the right to buy an agreed number
of the company’s ordinary equity at an agreed time and at an agreed price (strike
price/exercise price) .A convertible is known as a European option because it can only
be exercised at an expiration date. A bond with a warrant is an American option
because it can be exercised at any time before the expiration time. It gives an option
within an option. With a warrant you become a shareholder and also a bond holder,
the warrant can be detached from the bond,i.e it can have its own market value. It’s a
highly valued instrument compared to the convertible. At this stage the company has
to take advantage of financial leverage because earnings are increasing but cannot
borrow outright because business risk is still high and financial risk has to be
minimized. To go around this problem, option based instruments have to be used.
Option based bonds (sweeteners) are cheaper than plain vanilla bonds. They reduce
the total cost of borrowing. Option based bonds can be issued at low coupon rates
because they will gain value, that is they are participating in the growth of the
company.

DR T.J MABVURE
 Ordinary bondholders have a fixed return and they don’t benefit from the increase in
the value of the share. After the exercise the equity base will increase and the debt
will decrease, that is the capital structure will shift, for the convertible bonds. For the
bond with warrants, the debt levels will remain the same and the equity will increase,
also with these bonds there will be a fresh injection of funds as the shares have to be
bought. With the options the company will be preparing for the restructuring of the
balance sheet, i.e restructuring at the initial public offer (IPO) and then another
restructuring at the exercise of the options.

Maturity

This is a stage at which the balance sheet will also be restructured.

 Rights issue/seasoned issue; New shares to existing shareholders. The rationale is to
reward the shareholders for being loyal because they have made the company grow by
accepting low or no dividends for capital gains. The company does not want to dilute
the earnings of the shareholders.

 Exercise of options if convertibles and warrants had been issued.

 Net cash flows are now high, that is positive. High turnover with low cost of R&D.
Main expenditure is advertising rather than promotional because brand is now
established. Consolidating your position by tour brand. No need to reinvest as the
market opportunities for expansion is now low.

 Dividends now high because growth opportunities now reduced,i.e retentions now
reduced.

 Cash cow because some of the cash flows can be used to finance new SBUs.
 The returns now dividends yields rather than capital gains.
 Bond holders now interested in dividends rather than capital gains and also this holds
for all the former shareholders who the company started with.

 The P/E ratio now low

 The operating risk now very low

DR T.J MABVURE
  Gearing ratio low, can now afford to have plain vanilla debt because the cash flows
are there.

Decline

 Divesting/harvesting
 Zero opportunities
 Total dividend, that is 100% payout
 Not able to increase borrowings because the required rate of return will be high. If the
company increase borrowings and the company is wound up the share of the debt
holders will increase in the company. Therefore the debt/equity ratio has to be
decreased.
 The company will grow(g) at the same rate as the growth of the economy
(10 Marks)

[Total: 20 Marks]

QUESTION TWO

a. Firms are exposed to market risk and firm specific risk.

i. Using clear illustrations show that firm specific risk, industry specific risk, and
sector specific risk can be diversified away, whereas market risk cannot.

(10 marks)
ANSWER
Firm specific risk, industry specific risk, and sector specific risk are diversifiable risk. This is
risk specific a sector, firm, and industry. In order to do away with this risk there is need to
invest in more firms or industries as investing in one firm, industry, or sector is akin to
putting eggs in one basket. Market risk cannot be diversified away regardless or the number
of counters you may invest in. The diagram attracts 3 Marks.
(10 Marks)

DR T.J MABVURE
 ii. Discuss the main components of market risk or non-diversifiable risk. Clearly
indicate why this risk cannot be diversified away.

(10 Marks)
ANSWER
Market risk is the non-diversifiable risk of a firm. It’s also known as systematic risk and it is
represented by the beta (β) coefficient. The three kinds of market risk are: Inflation risk,
interest rate risk, and exchange rate risk. These risks cannot be diversified away regardless
of the many counters, sectors, or industries one may invest in. (10 Marks)

NB. Students to explain satisfactorily each type of risk, and not just state the risk.
Three marks for each risk and a mark for good presentation.

[Total: 20 Marks]

QUESTION THREE

Vasco Marcop Vizhani Plc has sales per share of $1100 and earnings of $565 per share. The
book value of Equity was $846 per share. After paying out dividends the company retained
40% of its earnings. It’s estimated that the current period, which is a high growth period will
last for 20 years. During this period systematic risk (non-diversifiable risk) will be 1.25,
Treasury Bill Rate will be 20%, and the Return on the Stock market will be 30%. After the
high growth period the growth rate will stabilise to 15% p.a and the retention ratio will
decrease to 20%. The systematic risk will drop to 0.95 and the other market parameters will
remain the same.
a. Calculate the Profit Margin, Sales to book value, retention ratio, and growth rate in
earnings.
(5 Marks)

ANSWER

(1 Mark)

𝐑𝐞𝐭𝐞𝐧𝐭𝐢𝐨𝐧 𝐑𝐚𝐭𝐢𝐨 = 𝟒𝟎%

𝑷𝒂𝒚𝒐𝒖𝒕 𝑹𝒂𝒕𝒊𝒐 = 𝟏 − 𝟎. 𝟒𝟎 = 𝟎. 𝟔𝟎 (1 Mark)

DR T.J MABVURE
 (2 Marks)
b. Determine the Price to Sales multiple and commend on your findings. (10 Marks)

ANSWER

𝑲𝒆 = 𝑹𝒇 + 𝜷(𝑹𝒎 − 𝑹𝒇) = 𝟐𝟎 + 𝟏. 𝟐𝟓(𝟑𝟎 − 𝟐𝟎) = 𝟑𝟐. 𝟓% (1 Mark)

𝑲𝒆𝒏 = 𝟐𝟎 + 𝟎. 𝟗𝟓(𝟑𝟎 − 𝟐𝟎) = 𝟐𝟗. 𝟓% (1 Mark)
𝑷𝒂𝒚𝒐𝒖𝒕 = 𝟔𝟎% = 𝟎. 𝟔
𝑷𝒂𝒚𝒐𝒖𝒕𝒏 = 𝟖𝟎% = 𝟎. 𝟖
𝒈𝒏 = 𝟏𝟓%

(1 Mark)

)𝟐𝟎

𝑷𝑺 = 𝟎. 𝟓𝟏𝟑𝟔(𝟕. 𝟕𝟓𝟕𝟗𝟕𝟖𝟑𝟐𝟕 + 𝟐. 𝟓𝟗𝟔𝟎𝟗𝟏𝟗𝟗𝟓) = 𝟓. 𝟑𝟏𝟕𝟖𝟓𝟎𝟓𝟏𝟕 (4 Marks)

Comment

The PS multiple is 5.32. This is the fundamental PS. If the market PS is below 5.32then it
means that the market is undervaluing the firm and if the market PS is above 5.32 it means
that the market is overvaluing the firm. The PS multiple can also be used to compare firms
across industries, across countries, etc. If the PS multiple is below or above the one across
markets, industries, then the finance manage has to be guided accordingly and advise how the
firm should steer itself to within the levels of other industries or markets. However
comparison across industries and markets are always without its other challenges as there
may be fundamental
differences in these different markets. (3 Marks)

NB. To earn full marks student has to comment on issues of the PS multiple in relationship to
the local market as well as across industries and across markets.

DR T.J MABVURE
 QUESTION FOUR

Wamba Dia Delta PLC has reported the following

2017(Reported) 2018(Projected)
$’000 $’000
Net Income 14 000 18 500
Capital Expenditures 2 000 3 800
Depreciation 2 500 2 800
Working Capital (2016-$800) 600 400
Debt (Market Value) 30 000
Equity (Market Value) 80 000
Principal Repayments 6 000 6 000
Proceeds from new Debt Issues 9 000

The firm plans to increase the debt ratio to 35% by end of year 2018. This debt ratio is
considered optimal. To achieve this target the company plans to finance its capital
expenditures and working capital needs between 2017 and 2018 by 30% Equity and 20%
Preferred capital.
Required
Calculate the FCFE for 2017 and 2018 (10 Marks)
[Total: 10 Marks]
ANSWER

𝐏𝐫𝐨𝐜𝐞𝐞𝐝𝐬 𝐟𝐫𝐨𝐦 𝐧𝐞𝐰 𝐝𝐞𝐛𝐭 𝐢𝐬𝐬𝐮𝐞𝐬 = 𝐏𝐫𝐢𝐧𝐜𝐢𝐩𝐚𝐥 𝐫𝐞𝐩𝐚𝐲𝐦𝐞𝐧𝐭𝐬 + 𝐝(𝐂𝐀𝐏𝐄𝐗 + 𝚫𝐖𝐂)

𝐏𝐫𝐨𝐜𝐞𝐞𝐝𝐬 𝐟𝐫𝐨𝐦 𝐧𝐞𝐰 𝐝𝐞𝐛𝐭 𝐢𝐬𝐬𝐮𝐞𝐬 = 𝟔𝟎𝟎𝟎 + 𝟎. (𝟑𝟖𝟎𝟎 − 𝟐𝟎𝟎) = $𝟕𝟖𝟎𝟎 (2 Marks)

2017 2018
Net Income 14000 (1/2 Mark) 18500 (1/2 Mark)
Depreciation 2500 (1/2 Mark) 2800 (1/2 Mark)
Cash Flow from Operations 16500 (1/2 Mark) 21300 (1/2 Mark)
CAPEX (2000) (1/2 Mark) (3800) (1/2 Mark)
∆WC 200 (1/2 Mark) 200 (1/2 Mark)
Principal Repayments (6000) (1/2 Mark) (6000) (1/2 Mark)
Proceeds from New Debt Issues 9000 (1/2 Mark) 7800 (1/2 Mark)
FCFE 17700 (1/2 Mark) 19500 (1 /2Mark)

QUESTION FIVE
Makhatarian Miyang Plc has reported net earnings after-tax (Net Income) of $2 500 000 and
paid a 30% dividend. The shareholders equity was reported to be having a book value of $5
000 000. The other information for the company is presented below.
Current Information $’000
Operating Earnings 7 000

DR T.J MABVURE
 Capital Expenditures 5 900
Depreciation 4 800
Working capital 13% of Revenues
Revenues 10 000
Tax rate for all periods 30%

High Growth Period Information

Length of Period 4 years
The Current growth rate will be maintained in the high Growth phase. Capital
expenditures, revenues, depreciation, earnings, and dividends will grow at this growth
rate.
Debt Capital ratio 10%
Preference Share Capital Ratio 5%

Pre-tax cost of debt 13%

Cost of Preferred capital 10%

Working capital as a percentage of Revenues 13%

Systematic Risk 1.70
Risk Premium 8%
Treasury bill Rate 18%

Transition Growth Period Information

Length of period 4 years
Growth rate in operating earnings & revenues will decline from year four (4) to year
eight (8) linearly. The growth rate will be 17.5% in year eight (8).
Growth rate in Capital expenditures 17.5%
Growth rate in Depreciation 22%
Systematic Risk will drop from 1.70 to 1.0 in year 8 linearly
Return on the Stock Market 20%
Return on the market for short term securities 14%
Working capital as a percentage of revenues 10%
Debt ratio 20%
Preference Share Capital Ratio 10%
After tax cost of debt 11%
Cost of preferred Capital 8%

Stable Growth Period Information

Growth rate in operating earnings and revenues will be
8% in perpetuity
After tax cost of debt 10%
Cost of preferred capital 7%
Capital expenditures and Depreciation will
cancel out each other
Non-diversifiable risk 0.6
Return on the market for long-term securities 15%
Money Market Rate of Return 10%
Debt ratio 25%
Preferred capital ratio 15%

DR T.J MABVURE
 Working capital as a percentage of Revenues 9%

Required
Determine the value of Makhatarian Miyang Plc and comment on how your findings will
assist the company, existing investors, and potential investors. (25
Marks)

[Total: 25 Marks]

ANSWER

𝑹𝒆𝒕𝒆𝒏𝒕𝒊𝒐𝒏 𝑹𝒂𝒕𝒊𝒐 = 𝟏 − 𝑷𝒂𝒚𝒐𝒖𝒕 𝑹𝒂𝒕𝒊𝒐 = 𝟏 − 𝟎. 𝟑𝟎 = 𝟎. 𝟕𝟎 (1/2 Mark)

HIGH GROWTH PHASE

𝑲𝒆 = 𝑹𝒇 + 𝜷(𝑹𝒎 − 𝑹𝒇) = 𝟏𝟖 + 𝟏. 𝟕(𝟖) = 𝟑𝟏. 𝟔% (1/2 Mark)

𝑾𝑨𝑪𝑪 = 𝑾𝒆𝑲𝒆 + 𝑾𝒅𝑲𝒅(𝟏 − 𝑻) + 𝑾𝒑𝑲𝒑
𝑾𝑨𝑪𝑪 = 𝟎. 𝟖𝟓 ∗ 𝟑𝟏. 𝟔 + 𝟎. 𝟏𝟎 ∗ 𝟏𝟑(𝟏 − 𝟎. 𝟑𝟎) + 𝟎. 𝟎𝟓 ∗ 𝟏𝟎 = 𝟐𝟖. 𝟐𝟕 (𝟏/𝟐
𝐌𝐚𝐫𝐤)

YEAR 0 1 2 3 4
CAPEX (g=35%) 5900.00 7965.0000 10752.7500 14516.2125 19596.8869
DEPRECIATION 4800.00 6480.0000 8748.0000 11809.8000 15943.2300
(g=35%)
REVENUES 10000.00 13500.0000 18225.0000 24603.7500 33215.0625
(g=35%)
WC(13% Of 1,300.00 1755.0000 2369.2500 3198.4875 4317.9581
Revenues)
∆WC 455.0000 614.2500 829.2375 1119.4706

DR T.J MABVURE
 EBIT (g=35%) 7000.00 9450.0000 12757.5000 17222.6250 23250.5438
Less T(EBIT) 2100.00 2835.0000 3827.2500 5166.7875 6975.1631
Less CAPEX-DEP 1100.00 1485.0000 2004.7500 2706.4125 3653.6569
Less ∆WC 455.0000 614.2500 829.2375 1119.4706
FCFF 4675.0000 6311.2500 8520.1875 11502.2531

(3 Marks)

TRANSITION PHASE

Year 4 5 6 7 8
g 35 30.625 26.25 21.875 17.5
β 1.7 1.525 1.35 1.175 1
(1/2 Mark)

Ke 23.15 22.1 21.05 20

Kp 8 8 8 8
Kd 11 11 11 11

We 0.7
Wd 0.2
Wp 0.1

𝑲𝒆 = 𝑹𝒇 + 𝜷(𝑹𝒎 − 𝑹𝒇)

𝑲𝒆𝒀𝟓 = 𝟏𝟒 + 𝟏. 𝟓𝟐𝟓(𝟐𝟎 − 𝟏𝟒) = 𝟐𝟑. 𝟏𝟓 (1/2 Mark)

𝑲𝒆𝒀𝟔 = 𝟏𝟒 + 𝟏. 𝟑𝟓(𝟐𝟎 − 𝟏𝟒) = 𝟐𝟐. 𝟏 (1/2 Mark)
𝑲𝒆𝒀𝟕 = 𝟏𝟒 + 𝟏. 𝟏𝟕𝟓(𝟐𝟎 − 𝟏𝟒) = 𝟐𝟏. 𝟎𝟓 (1/2 Mark)
𝑲𝒆𝒀𝟖 = 𝟏𝟒 + 𝟏(𝟐𝟎 − 𝟏𝟒) = 𝟐𝟎 (1/2 Mark)

𝑾𝑨𝑪𝑪 = 𝑾𝒆𝑲𝒆 + 𝑾𝒅𝑲𝒅(𝟏 − 𝑻) + 𝑾𝒑𝑲𝒑

DR T.J MABVURE
 𝑾𝑨𝑪𝑪𝒚𝟓 = 𝟎. 𝟕 ∗ 𝟐𝟑. 𝟏𝟓 + 𝟎. 𝟐 ∗ 𝟏𝟏 + 𝟎. 𝟏 ∗ 𝟖 = 𝟏𝟗. 𝟐𝟎𝟓 (1/2 Mark)
𝑾𝑨𝑪𝑪𝒚𝟔 = 𝟎. 𝟕 ∗ 𝟐𝟐. 𝟏 + 𝟎. 𝟐 ∗ 𝟏𝟏 + 𝟎. 𝟏 ∗ 𝟖 = 𝟏𝟖. 𝟒𝟕 (1/2 Mark)
𝑾𝑨𝑪𝑪𝒚𝟕 = 𝟎. 𝟕 ∗ 𝟐𝟏. 𝟎𝟓 + 𝟎. 𝟐 ∗ 𝟏𝟏 + 𝟎. 𝟏 ∗ 𝟖 = 𝟏𝟕. 𝟕𝟑𝟓 (1/2 Mark)
𝑾𝑨𝑪𝑪𝒚𝟖 = 𝟎. 𝟕 ∗ 𝟐𝟎 + 𝟎. 𝟐 ∗ 𝟏𝟏 + 𝟎. 𝟏 ∗ 𝟖 = 𝟏𝟕 (1/2 Mark)

5 6 7 8
Ke 23.15 22.1 21.05 20
WACC 19.205 18.47 17.735 17

4 5 6 7 8
CAPEX (g=17.5%) 19,596.89 23026.3421 27055.9519 31790.7435 37354.1236
DEPRECIATION 15,943.23 19450.7406 23729.9035 28950.4823 35319.5884
(g=22%)
REVENUES 33,215.06 43387.1754 54776.3089 66758.6265 78441.3861
WC(10% Of 4,317.96 4338.7175 5477.6309 6675.8627 7844.1386
Revenues)
∆WC 1,119.47 20.7594 1138.9134 1198.2318 1168.2760

EBIT 23,250.54 30371.0228 38343.4163 46731.0386 54908.9703

Less T(EBIT) 6,975.16 9111.3068 11503.0249 14019.3116 16472.6911
Less CAPEX-DEP 3,653.66 3575.6015 3326.0484 2840.2612 2034.5352
Less ∆WC 1,119.47 20.7594 1138.9134 1198.2318 1168.2760
FCFF 11,502.25 17663.3550 22375.4296 28673.2340 35233.4680

(3 Marks)

Diagram of the three stages showing time and the respective growth rates (1 Marks)

5 6 7 8
WACC 1.19205 1.1847 1.17735 1.17

DR T.J MABVURE
 (2 Marks)

STABLE PHASE

Kp 7
Kd 10

We 0.6
Wd 0.25
Wp 0.15

9
g 8
β 0.6

Rf 10
Rm 15

𝑲𝒆𝒀𝒓𝟗 = 𝑹𝒇 + 𝜷(𝑹𝒎 − 𝑹𝒇)

𝑲𝒆𝒀𝒓𝟗 = 𝟏𝟎 + 𝟎. (𝟏𝟓 − 𝟏𝟎) = 𝟏𝟑% (1/2 Mark)
𝑾𝑨𝑪𝑪 = 𝑾𝒆𝑲𝒆 + 𝑾𝒅𝑲𝒅(𝟏 − 𝑻) + 𝑾𝒑𝑲𝒑
𝑾𝑨𝑪𝑪 = 𝟎. 𝟔 ∗ 𝟏𝟑 + 𝟎. 𝟐𝟓 ∗ 𝟏𝟎 + 𝟎. 𝟏𝟓 ∗ 𝟕 = 𝟏𝟏. 𝟑𝟓 (1/2 Mark)

Year 9
Ke 13
WACC 11.35

8 9
REVENUES 78,441.39 84716.6970
(g=8%)
WC(9% Of 7,844.14 7624.5027
Revenues)

DR T.J MABVURE
 ∆WC 1,168.28 -219.6359

EBIT 54,908.97 59301.6879

Less T(EBIT) 16,472.69 17790.5064
Less ∆WC 1,168.28 -219.6359
FCFF 35,233.47 41730.8174
(1 Marks)

(1 Marks)

(1 Marks)

𝑷𝟎 = 𝟏𝟓 𝟕𝟔𝟔. 𝟔𝟒 + 𝟐𝟒 𝟑𝟖𝟕.𝟒𝟕𝟔𝟑𝟗 + 𝟐𝟑𝟔 𝟓𝟒𝟔.𝟗𝟕𝟑 = $𝟐𝟕𝟔 𝟕𝟎𝟏.𝟎𝟖𝟗𝟕

(1 Mark)

COMMENT
The fair price according to the fundamentals is $276 701.0897. Any price above will mean
the price is overvalued and any price below means the firm is under-priced. So investors are
better guided when buying the firm in the Real Estate market. The value is also beneficial for
mergers
and acquisitions purposes. (2 Marks)

QUESTION SIX
Jigrosi Murainho Plc has the following ratios.
A*/S 8.70
L*/S 5.98
Profit Margin 0.75
Dividend Payout Ratio 0.86
Sales last year were $629 million

Required
External capital is very expensive in the environment that Jigrosi Murainho Plc is operating.
Given the scenario cited in the last statement, determine the maximum growth rate the
company can achieve without having to employ external funds. In your calculations assume
that the ratios given will remain constant
(10 marks) `
[Total: 10 Marks] ANSWER

DR T.J MABVURE
 𝑨𝑭𝑵 = (𝑨∗⁄𝑺)∆𝑺 − (𝑳∗⁄𝑺)∆𝑺 − 𝑴𝑺𝟏 (𝟏 − 𝒅𝒊𝒗) (1 Mark)
𝟎 = (𝑨∗⁄𝑺)𝑺𝟎 − (𝑳∗⁄𝑺)𝒈𝑺𝟎 − 𝑴𝑺𝟏(𝟏 − 𝒅) (1
Mark) = 𝟖. 𝟕𝟎𝒈𝑺𝟎 − 𝟓. 𝟗𝟖𝒈 ∗ 𝟔𝟐𝟗 − 𝟎𝟕𝟓(𝟔𝟐𝟗 + 𝒈𝟔𝟐𝟗)(𝟏 − 𝟎. 𝟖𝟔)
(1 Mark)

𝟖. 𝟕𝟎𝒈𝟔𝟐𝟗 − 𝟓. 𝟗𝟖𝒈 𝟔𝟐𝟗 − 𝟎. 𝟕𝟓(𝟔𝟐𝟗 + 𝒈𝟔𝟐𝟗)(𝟏 − 𝟎. 𝟖𝟔)=0 (1 Mark)

𝟓𝟒𝟕𝟐. 𝟑𝒈 −3761.42g-0.75(88.06+88.06g)=0 (1 Mark)
𝟓𝟒𝟕𝟐.3g-3761.42g-66.045-66.045g=0 (1 Mark)

𝟏𝟔𝟒𝟒.835g=66.045 (1 Mark)

𝟔𝟔.𝟎𝟒𝟓
(1 Mark)

The maximum growth rate the company can achieve without having to employ external funds
is 4.0153%
(2 Marks)

DR T.J MABVURE
 QUESTION ONE

The following Information was reported for G-Fourntana Plc

$m
EBIT 6 000
CAPEX 4 800
Depreciation 3 900
Working capital 13% of Revenues
Revenues 9 000
Tax rate for all periods 35%

High Growth Rate

Length of Period 4 years
Dividend Payout Ratio 40%
Return on Equity 50%
Debt Capital ratio 20%
Preferred Capital Ratio 10%

Pre-tax cost of debt 14%

Cost of Preferred capital 9%

Working capital is 13% of Revenues

β = 1.80 Rm = 26% Rf=18%

Transition Period
 Length of period 4 years
 Growth rate in EBIT & Revenues will decline from year four (4) to year eight (8). The
growth rate will be 15% in year 8.
 Growth rate in CAPEX 15%
 Growth rate in Depreciation 17%
 β will drop from 1.80 to 1.1 in year 8 linearly
 Rm = 24% Rf =16%
 Working capital as a percentage of Revenues 13%
 Debt ratio 25%

DR T.J MABVURE
  Preferred Capital Ratio 12%
 After tax cost of debt 11%
 Cost of preferred Capital 8%

Stable Period
 Growth rate in EBIT and revenues will be 8% in perpetuity
 After tax cost of debt 10%
 Cost of preferred capital 7%
 CAPEX and Depreciation will cancel each other
 β = 0.6 Rm = 22% Rf =14%
 Debt ratio 27%
 Preferred capital ratio 15%
 Working capital as a percentage of Revenues 10%

Required
a. Calculate the intrinsic value of G-Fourntana Plc ns comment on your findings
(25marks)

ANSWER

HIGH GROWTH PHASE

𝒈 = 𝒃 ∗ 𝑹𝑶𝑬 = 𝟏 − 𝑷𝒂𝒚𝒐𝒖𝒕 𝑹𝒂𝒕𝒊𝒐 ∗ 𝑹𝑶𝑬 = (𝟏 − 𝟎. 𝟒) ∗ 𝟓𝟎 = 𝟑𝟎% (1 Mark)

𝑶𝒓𝒅𝒊𝒏𝒂𝒓𝒚 𝑺𝒉𝒂𝒓𝒆 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 𝑹𝒂𝒕𝒊𝒐 = 𝟏 − 𝟎. 𝟐𝟎 − 𝟎. 𝟏𝟎 = 𝟕𝟎%
(1/2 Mark)
𝑲𝒆 = 𝑹𝒇 + 𝜷(𝑹𝒎 − 𝑹𝒇) = 𝟏𝟖 + 𝟏. 𝟖(𝟐𝟔 − 𝟏𝟖) = 𝟑𝟐. 𝟒 (1/2 Mark)
𝑾𝑨𝑪𝑪 = 𝑾𝒆𝑲𝒆 + 𝑾𝒅𝑲𝒅(𝟏 − 𝑻) + 𝑾𝒑𝑲𝒑 =
𝑾𝑨𝑪𝑪 = 𝟎. 𝟕 ∗ 𝟑𝟐. 𝟒 + 𝟎. 𝟐 ∗ 𝟏𝟒(𝟏 − 𝟎. 𝟑𝟓) + 𝟗(𝟎. 𝟏𝟎) = 𝟐𝟓. 𝟒 (1/2 Mark)

0 1 2 3 4
Capex (g=30% 4800 6240 8112 10545.6 13709.28
Depreciation (g=30%) 3900 5070 6591 8568.3 11138.79
Revenues (g=30%) 9000 11700 15210 19773 25704.9
Working Capital(13% of 1170 1521 1977.3 2570.49 3341.637
Revenues)
Change in Working Capital 351 456.3 593.19 771.147

EBIT (g=30%) 6000 7800 10140 13182 17136.6

Less T(EBIT) 2100 2730 3549 4613.7 5997.81
Less(CAPEX-Depreciation) 900 1170 1521 1977.3 2570.49
Less Change in Working Capital 351 456.3 593.19 771.147
FCFF 3549 4613.7 5997.81 7797.153
(3 Marks)

(1 Mark)

DR T.J MABVURE
 TRANSITION PHASE

(1/2 Mark)
(1/2 Mark)

4 5 6 7 8
Growth Rate 30 26.25 22.5 18.75 15
β 1.8 1.625 1.45 1.275 1.1
(1 Mark)
𝑲𝒆 = 𝑹𝒇 + 𝜷(𝑹𝒎 − 𝑹𝒇)
𝑲𝒆𝟐 = 𝟏𝟔 + 𝟏. 𝟔𝟐𝟓(𝟐𝟒 − 𝟏𝟔) = 𝟐𝟗 (1/2
Mark)
𝑲𝒆𝟑 = 𝟏𝟔 + 𝟏. 𝟒𝟓(𝟐𝟒 − 𝟏𝟔) = 𝟐𝟕. 𝟔 (1/2
Mark)
𝑲𝒆𝟒 = 𝟏𝟔 + 𝟏. 𝟐𝟕𝟓(𝟐𝟒 − 𝟏𝟔) = 𝟐𝟔. 𝟐 (1/2
Mark)
𝒆𝟓 = 𝟏𝟔 + 𝟏. 𝟏(𝟐𝟒 − 𝟏𝟔) = 𝟐𝟒. 𝟖 (1/2
Mark)
𝑾𝑨𝑪𝑪 = 𝑾𝒆𝑲𝒆 + 𝑾𝒅𝑲𝒅(𝟏 − 𝑻) + 𝑾𝒑𝑲𝒑
𝑾𝑨𝑪𝑪𝒀𝒓𝟓 = 𝟎. 𝟔𝟑(𝟐𝟗) + 𝟎. 𝟐𝟓(𝟏𝟏) + 𝟎. 𝟏𝟐(𝟖) = 𝟐𝟏. 𝟗𝟖 (1/2
Mark)
𝑾𝑨𝑪𝑪𝒀𝒓𝟔 = 𝟎. 𝟔𝟑(𝟐𝟕. 𝟔) + 𝟎. 𝟐𝟓(𝟏𝟏) + 𝟎. 𝟏𝟐(𝟖) = 𝟐𝟏. 𝟎𝟗𝟖 (1/2
Mark)
𝑾𝑨𝑪𝑪𝒀𝒓𝟕 = 𝟎. 𝟔𝟑(𝟐𝟔. 𝟐) + 𝟎. 𝟐𝟓(𝟏𝟏) + 𝟎. 𝟏𝟐(𝟖) = 𝟐𝟎. 𝟐𝟏𝟔 (1/2
Mark)
𝑾𝑨𝑪𝑪𝒀𝒓𝟖 = 𝟎. 𝟔𝟑(𝟐𝟒. 𝟖) + 𝟎. 𝟐𝟓(𝟏𝟏) + 𝟎. 𝟏𝟐(𝟖) = 𝟏𝟗. 𝟑𝟑𝟒 (1/2
Mark)

DR T.J MABVURE
 4 5 6 7 8
13709.2 20850.1012
Capex (g=15%) 8 15765.672 18130.5228 2 23977.6164
Depreciation 11138.7 15247.8896 17840.0308
(g=17%) 9 13032.3843 3 7 20872.83612
Revenues(g=Increasi
ng @ a Decreasing 32452.4362 39754.2344 47208.1533
rate) 25704.9 5 1 6 54289.37636
Working 3341.63 4218.81671 5168.05047 6137.05993
Capital(13% of 7 3 3 7
Revenues) 7057.618927
Change in Working 877.179712 949.233760 969.009463
Capital 771.147 5 8 5 920.55899

EBIT(g=Increasing @ 26502.8229 31472.1022

a Decreasing rate) 17136.6 21634.9575 4 4 36192.91757
7572.23512 9275.98802 11015.2357
Less T(EBIT) 5997.81 5 9 8 12667.52115
Less(CAPEX- 2882.63316 3010.07035
Depreciation) 2570.49 2733.2877 9 2 3104.780287
Less Change in 877.179712 949.233760 969.009463
Working Capital 771.147 5 8 5 920.55899
7797.15 10452.2549 13394.9679 16477.7866
FCFF 3 6 8 4 19500.05714

(3 Marks)

(2 Marks)
STABLE PHASE
𝑲𝒆𝒏 = 𝑹𝒇 + 𝜷(𝑹𝒎 − 𝑹𝒇)
𝑲𝒆𝒏 = 𝟏𝟒 + 𝟎. 𝟔(𝟐𝟐 − 𝟏𝟒) = 𝟏𝟖. 𝟖 (1/2 Mark)
𝑾𝑨𝑪𝑪𝒏 = 𝑾𝒆𝑲𝒆 + 𝑾𝒅𝑲𝒅(𝟏 − 𝑻) 𝑾𝒑𝑲𝒑
𝑾𝑨𝑪𝑪𝒏 = 𝟎. 𝟓𝟖(𝟏𝟖. 𝟖) + 𝟎. 𝟐𝟕(𝟏𝟎) + 𝟎. 𝟏𝟓(𝟕) = 𝟏𝟒. 𝟔𝟓𝟒 (1/2 Mark)

DR T.J MABVURE
 8 9
Revenues (g=8%) 54289.37636 58632.53
Working Capital(10% of Revenues) 7057.618927 5863.253
Change in Working Capital 920.55899 -1194.37

EBIT(g=Increasing @ a Decreasing rate) 36192.91757 39088.35

Less T(EBIT) 12667.52115 13680.92
Less Change in Working Capital 920.55899 -1194.37
FCFF 19500.05714 26601.79
(1 Mark)

(2 Marks)

(2 Marks)

𝟎= $𝟏𝟏𝟗𝟓𝟖. 𝟖𝟒𝟗𝟑𝟗 + $𝟏𝟒𝟔𝟎𝟗. 𝟕𝟕𝟐𝟑𝟕 + $𝟕𝟔𝟑𝟔𝟕. 𝟔𝟏𝟔𝟑𝟏 $𝟏𝟎𝟐 𝟗𝟑𝟔. 𝟐𝟑𝟖𝟏

𝟏
(𝟏 ⁄𝟐 𝑴𝒂𝒓𝒌𝒔

b. Comment on the significance of this value to a potential investor (5marks)

ANSWER
If the price of the company on the market is below $𝟏𝟎𝟐𝟗𝟑𝟔. 𝟐𝟑𝟖𝟏it means that the
firm is undervalued. If the market value is above $𝟏𝟎𝟐𝟗𝟑𝟔. 𝟐𝟑𝟖 then it means that
the company is undervalued. The intrinsic value guides the buyer and the seller of the
firm in terms of the fair valuation of the company. (5 Mark)

[30 Marks]

DR T.J MABVURE
 QUESTION TWO

Tryphosa Plc has the following ratios.

A*/S 6.70
L*/S 4.98
Profit Margin 0.7
Dividend Payout Ratio 0.80
Sales last year were $375 million

Required
Determine the maximum growth rate the company can achieve without having to employ
external funds. Use the additional funds needed (AFN) in your calculations.

NB. The assumptions is that these ratios will remain constant (10 marks).
[10 Marks]

ANSWER

𝑨𝑭𝑵 = (𝑨∗⁄𝑺)∆𝑺 − (𝑳∗⁄𝑺)∆𝑺 − 𝑴𝑺𝟏 (𝟏 − 𝒅𝒊𝒗) (1 Mark)

(𝑨∗ ⁄ 𝑺)𝒈𝑺𝟎 − (𝑳∗ ⁄ 𝑺)𝒈𝑺𝟎 − 𝑴 (𝑺𝟎 + 𝑺𝟎𝒈𝟎)(𝟏 − 𝑫𝒊𝒗) = 𝟎 (1 Mark)

𝟔. 𝟕𝟎 ∗ 𝟑𝟕𝟓𝒈 − 𝟒. 𝟗𝟖 ∗ 𝟑𝟕𝟓𝒈 − 𝟎. 𝟕(𝟑𝟕𝟓 + 𝟑𝟕𝟓𝒈)(𝟏 − 𝟎. 𝟖𝟎) = 𝟎 (1 Mark)

𝟐𝟓𝟏𝟐. 𝟓𝒈 − 𝟏𝟖𝟔𝟕. 𝟓𝒈 − (𝟐𝟔𝟐. 𝟓 + 𝟐𝟔𝟐. 𝟓𝒈)(𝟎. 𝟐) = 𝟎
(1 Mark)

𝟐𝟓𝟏𝟐. 𝟓𝒈 − 𝟏𝟖𝟔𝟕. 𝟓𝒈 − 𝟓𝟐. 𝟓 − 𝟓𝟐. 𝟓𝒈 = 𝟎 (1 Mark)

𝟓𝟗𝟐. 𝟓𝒈 − 𝟓𝟐. 𝟓 = 𝟎 (1 Mark)

𝟓𝟗𝟐. 𝟓𝒈 = 𝟓𝟐. 𝟓 (1 Mark)

(2 Mark)

The maximum growth rate the company can achieve without having to employ external
funds is 8.86%. (1 Mark)

DR T.J MABVURE
 END OF MARKING GUIDE
S

DR T.J MABVURE