Reference no: EM132417175
Question
Consider ABC Company's financial statements given below. This company belongs to the retail sector and the current market price is $20 per shares with 50,000 common shares outstanding. All net income is re-invested back into the company. Assume the Company's beta on YEAR 0 is estimated to be 1.75, due to lack of historical data. For the foreseeable future risk-free rate is 2.5%, and market risk premium is 11%. Furthermore, assume the company has a long-term growth rate in comprehensive income and FCF for 2.5% after the fifth year. Net income and comprehensive income will be identical. Expect debt to equity ratio and WACC to be the same after year 5 and beyond.
Income Statement
Year 1 Year 2 Year 3 Year 4 Year 5
Revenues 2,173,600 2,282,280 2,396,394 2,516,214 2,667,024
Cost of Sales 1,395,708 1,490,980 1,578,910 1,685,954 1,814,508
Gross Profit 777,892 791,300 817,484 830,259 852,516
Accounting 6,240 6,552 6,880 7,224 7,585
Advertising & Promo 47,759 42,640 40,363 37,778 34,853
Bank Charges 43,156 45,314 47,579 49,958 52,457
Com & Benefits 256,509 264,204 272,130 280,294 288,702
Consulting Fees 2,496 - - - -
Insurance 1,040 1,092 1,147 1,204 1,265
Lease - Facilities 349,440 349,440 349,440 349,440 349,440
Legal & Professional 500 500 500 500 500
Licenses & Fees 500 510 520 531 541
Maintenance 600 612 624 637 649
Miscellaneous 1,800 1,836 1,873 1,910 1,948
Office supplies 2,700 2,754 2,809 2,865 2,923
Security 720 742 764 787 810
Telephone 1,800 1,836 1,873 1,910 1,948
Utilities 4,200 4,410 4,631 4,862 5,105
Website 1,800 1,800 1,800 1,800 1,800
Total Operating Exp. 721,260 724,242 732,932 741,700 750,525
EBIDTA 56,633 67,058 84,552 88,560 101,991
Depreciation 4,916 4,916 4,916 4,916 4,916
Operating Profit 51,717 62,142 79,636 83,644 97,075
Interest Expense 11,040 10,488 9,936 9,384 8,832
Earnings Before Taxes 40,677 51,654 69,700 74,260 88,243
Income Taxes 8,542 10,847 14,637 15,595 18,531
Net Income 32,135 40,807 55,063 58,665 69,712
BALANCE SHEET
Begin Year 1 Year 2 Year 3 Year 4 Year 5
Cash 33,150 50,685 80,307 122,461 166,233 239,914
Inventory 77,000 191,916 213,416 237,641 264,950 278,197
Total Current Assets 110,150 242,601 293,723 360,102 431,183 518,111
Fixed Assets 33,850 33,850 33,850 33,850 33,850 33,850
Less: Depreciation - 4,916 9,832 14,748 19,664 24,580
Net Fixed Assets 33,850 28,934 24,018 19,102 14,186 9,270
Total Assets 144,000 271,535 317,741 379,204 445,369 527,381
Accounts Payable - 100,000 110,000 121,000 133,100 150,000
Long Term Debt 92,000 87,400 82,800 78,200 73,600 69,000
Total Liabilities 92,000 187,400 192,800 199,200 206,700 219,000
Owner's Equity
Paid in Capital 52,000 52,000 52,000 52,000 52,000 52,000
Retained Earnings - 32,135 72,941 128,004 186,669 256,381
Total Owner's Equity 52,000 84,135 124,941 180,004 238,669 308,381
Total L & EQ 144,000 271,535 317,741 379,204 445,369 527,381
Question 1: Use at least six financial ratios to assess and discuss profitability (three or more ratios) and risk analysis (three or more ratios) for the company.
Question 2: What is the company's value using the following methods?
a. Residual Income
b. Free Cash Flow (FCFF and FCFE) Assume no change in cash liquidity
c. Valuation Ratios (Market Multiples), use at least three ratios
d. Analyze and explain which one of the above valuation methods provides a better and more realistic valuation based on the solutions and data in this case