(As a student of corporate valuation ,You have been asked to estimated the value of Nomad limited, aprivate company using the discounted cash flow approach .You have been provided with the following information to enable you carry out the assignment.
On 31st December 2016,Nomad Limited earned Kenya shillings Five(5,000,000) million in earnings Before interest and Tax on revenue of Kenya shillings 30 million.The following extracts on data has also been provided for the financial year 2016.
(i) Total amount of debt outstanding in book value terms was three (3) million kenya shillings.The pre-tax interest rate on debt is ten percent.You have also established that book value and market value of debt is same.
(ii)The value of equity shown in the statement of financial position is five (5)million kenya shillings.Market value of equity for this firm should be based on the similar publicly listed companies relationship between book values and market values.
(iii)The amount for capital expenditure and depreciation was two(2)million and one(1)million respectively.
(iv) Amount of working capital investment for 2016 estimated as two percent of total revenue.
You have also been provided with the following information in respect of five comparable companies listed at the Nairobi securities exchange.
(a) The average beta has been estimated at 1.5
(b) The average debt-equity ratio based on the market value of equity is 0.25
(c) It is estimated that:
Market value of equity=3*Book value of equity
(d) Tax rate for all companies is 30%
You have also been provided with the following additional data:
(i) The average return on Nairobi securities exchange all share index(NASI) Is ten percent.
(ii) Average return (yield) on a ten year treasury bond has been estimated as six percent.
(iii) Revenues,Earnings before interest and tax,fixed capital investment,depreciation and working capital investment are expected to grow at an annual rate of five percent for ten years and two percent thereafter,forever except for fixed capital investment and depreciation which will offset each other at the steady state.
Required:
(i) Explain two challenges valuers experience when valueing private companied like Nomad.
(ii) Estimated the enterprise value for Nomad Limited (use three decimal places)