Case Study 2 : You have joined Zurich Pvt. Ltd as a Finance manager. You are given the following information:
Zurich Pvt Ltd. is a diversified manufacturing firm dealing with electrical appliances. In 2012, the firm reported an operating income of Rs. 857.60 million and faced a tax rate of 35% on income. The firm had a book value of equity is Rs. 4068.3 million and book value of debt of Rs.1567.83 million at the end of 2011.The management of the firm is expecting a stable growth at a rate of 5% annually.
You are aware that the risk free rate is 9% and the company operates in a risk premium of 7.5%. You have been informed that the beta for the company has averaged around 1.2. At the same time the after tax cost of debt is 11%.
Case Questions:
On the basis of the above mentioned information you as a finance manager are asked to provide the following :
• Estimate the firms return on capital.
• What would be the reinvestment rate of the firm?
• What is the cost of equity under which Zurich is operating?
• What is the cost of capital?
• What is the expected free cash flow to the firm?
• What is the value of the operating assets of firm?