The SoftTec Products Company is a successful small, rapidly growing, closely held corporation. The equity owners are considering selling the firm to an outside buyer and want to estimate the value of the firm.
Following is last year's income statement (2010) and projected income statements for the next four years (2011-2014). Sales and all items are expected to grow at an annual 7 percent rate beginning in 2015 and continuing thereafter.
(Thousands of AED) 2010 2011 2012 2013 2014
Net sales 150 200 250 300 350
cost of goods sold 75 100 125 150 175
Gross profit
Expenses 30 40 50 60 70
Depreciation 7.5 10 12.5 15 17.5
EBIT
Interest 3.5 3.5 3.5 3.5 3.5
EBT
Taxes(0%rate)
Net income
Selected balance sheet accounts at the end of 2010 were as follows. Net fixed assets were AED50,000. The sum of the required cash, accounts receivable, and inventories accounts was AED50,000. Accounts payable and accruals totaled AED25,000.
Each of these balance sheet accounts was expected to grow with sales over time. No changes in interest-bearing debt were projected and there were no plans to issue additional shares of common stock. There are currently 10,000 shares of common stock outstanding. Data have been gathered for a "comparable" publicly-traded firm in the same industry that SoftTec operates in.
The cost of common equity for similar ventures is estimated to be 25 percent.
SoftTec has survived for a period of years. Management is not currently contemplating a major financial structure change and believes a single discount rate is appropriate for discounting all cash flows.
1. Project SoftTec's income statement for 2015.
2. Evaluate the annual increases in required net working capital and capital expenditures (CAPEX) for SoftTec for the years 2011 to 2015.
3. Estimate SoftTec's terminal value cash flow at the end of 2014.
4. Project annual free cash flows for the years 2011 to 2015.
5. Estimate SoftTec's equity value in dollars and per share at the end of 2010.
6. Now assume that the AED35,000 in long-term debt (and therefore interest expense at 10%) is expected to grow with sales. Recalculate the equity using the original 25% discount rate.