Advance Financial Management

Advance Financial Management

Advance Financial Management

Part A) “Grubb & Grab “a corporate finance boutique

The future investment decision depends largely on the analyst report. Being an analyst at Grubb & Grab, this part will cover the evolution of the Spandex- a UK garment manufacturer currently trading on the AIM market for company partners, so that they can make future investment.

Value of Firm:

For the valuation of the company, the following data has been used:

Value of the firm

Data

EBIT

$900 million

Depreciation Charges

$400 million

Capital expenditure

$400 million

Working capital

4% of revenues

Revenues

$9,000 million

Outstanding debt

$1 billion

Pre-tax interest rate

8%

Shares outstanding

40 million

Shares Price

$40

Value of equity

$1,600

Total equity=liab

$2,600

Beta

1.5

Tax Rate

40%

Yield

4%

Risk premiums

5.50%

Additional Information

Expected revenues, earnings, capital expenditure and depreciation

Grow at 9.5% 4 Years

Then fall to 4% thereafter

Capital expenditure

120% of depreciation

In order to estimate the value of the firm, the Free Cash Flow for the Firm -FCFF will use. The reason for this is that there is no dividend given by the firm and if it was given the Dividend discount model would have been used to calculate the value of the firm. As there are no dividends, we will calculate firm value through FCFF.

For current and potential investors, investing in assets of a firm, the main interest is the ability of its management to generate positive cash flows from their operation, which not only cover all the costs, but also provide welfare gains. Therefore, the decision-making investors focus their attention not gross or net, and free cash flow of the company, which can be directed at their disposal.

Free cash flow to the firm (FCFF) is after-tax cash flow from its operating activities less net investment in fixed and working capital available to investors (creditors and owners).

Since this thread is created by the production or operating assets of the company, it is often referred to as cash flow from the assets. As FCFF is cash flow resulting from operating assets, which is directed to investors, its size must be equal to the sum of payments, and back. It follows from well-known rule of identity, or the balance of the cash flows.

Cash flow from assets = Cash flow to creditors + Cash flow to owners

In formalized form cash flows identity which can be defined by the following equation:

FCFF = FCFE + FCFD

Where

FCFD: cash flow to creditors;

FCFE: cash flow to the owners.

FCFF value can be calculated in different ways. In the structure of the flow can be divided into three main elements:

After-tax flow from operations;

Net investment in working capital;

Net investment in fixed assets.

Year

EBIT

EBIT (1-Tax)

Depreciation

Capital expenditure

Working Capital

FCFF

2011

900

540

400

400

14

526

2012

986

591

438

438

34

557

2013

1079

647

480

480

37

610

2014

1182

709

525

525

41

668

2015

1294

776

575

575

45

731

EBIT after tax has been obtained after deducting the tax which is 40% while depreciation has been 400 dollar for 2011 while working capital is 54. This figure of working capital has been obtained working capital of 2010 and working capital amount of 2011. It was assumed that 2010 working capital was 346 dollars which obtained through trail and error method considering that 2010 revenue increased with 4%. The difference is 14 dollars.

The following is the calculation

=346/ ...