Class 4: DCF. Problem 1

Class 4: DCF

Problem 1

In 2019 the corporation N which operates in emerging market has been evaluated by famous investment banks before being involved in the merger with the company T. Morgan Stanley suggested $2.8 for a share, JPMorgan Chase $2.5 and Deutsche Bank $3.1. Up to this moment N was fast growing company.

Position in 2019:

- Revenues 690,000.00

- Depreciation, Amortization $75,000.00

- EBIT $128,000.00

- Interest expense is $100 per year

- Income tax rate 36%

- Net Working Capital 10% of revenues

- Capital Expenditures$150,000.00

- WACC 20%

- 5,000 shares outstanding

- Net Debt $295,000

Forecast for 3 years:

- Revenue will grow at 15% per year

- Within two years the corporation is planning to implement operating costs reduction programme which will lead to the increase of sales profitability (EBIT/Sales) from current margin to 25% from 2nd year.

- Net working capital ratio in revenues will stay the same

- CAPEX and depreciation will grow at the same rate as revenues

Transition period after year 3:

- revenue growth rate will decline linearly to 5 % up to year 6

- net working capital rate stays the same

- CAPEX will grow at 8%, depreciation will grow at 12% a year

Since Year 6 the Company enters the stable growth period

- Revenue, D&A and CAPEX will grow at 5%

Requirеd:

- EV, Market Cap

- Calculate the fair price of 1 share and decide, which bank was closer to fair value