The following table shows four-year forecast for ABC Limited
Assume that after year 2020, earnings before interest and tax will remain constant at Kes 20 Million, depreciation will equal capital expenditure in each year, and working capital will not change. ABC’s weighted average cost of capital is 10% and its tax rate is 30%.
Required
i) Estimate the fair market value of ABC limited at the end of year 2016.
ii) Assume that ABC Limited has 4 Million shares outstanding and the market value of its interest bearing liabilities on the valuation date equal to Kes 2.5 Million. Estimate the fair market value per share of ABC’s equity at the end of 2016.
iii) For ABC Limited, assume that:
a) Free Cash flows in years 2017 through 2020 remain as stated in the table.
b) Earnings before interest and tax in the year 2020 is Kes 20 Million and then it grows at 5% per year forever.
c) Capital expenditure in the year 2021 exceeds depreciation by 3 million and this difference grows at 5% per year forever.
d) Working capital investment are kes 1.5 Million in 2021 and this amount grows at 5% per year forever.
Required
Estimate the fair Market value of ABC’s equity per share at the end of year 2016. Assume the value of debt is Kes 25 Million.