Business Analysis & Valuation

1). Project Cash Flow Statements (Indirect Method)

The project cash flow statements using the indirect method are shown below:

PROJECT CASH FLOW STATEMENT (INDIRECT METHOD)
  Year +1 Year +2 Year +3 Year +4 Year +5
Cash Flows from Operating Activities          
  Net Income $33,194 $56,514 $77,513 $99,772 $123,370
  Add Expenses Not Requiring Cash:          
    Depreciation 4916 4916 4916 4916 4916
    Amortization of Goodwill 0 0 0 0 0
    Other 0 0 0 0 0
  Other Adjustments:          
    Add Reduction in Accounts Receivable 0 0 0 0 0
    Add Increase in Wages Payable 0 0 0 0 0
    Add Increase in Accounts Payable 68908 70746 6983 7331 7699
    Subtract Decrease in Accounts Payable 0 1 2 3 4
    Subtract Increase in Inventory 0 -219 21239 22301 23416
    Subtract Increase in Prepaid Expenses 0 0 0 0 0
    Other 0 1 2 3 4
  Net Cash from Operating Activities $107,018 $131,959 $110,655 $134,326 $159,409
Cash Flows from Investing Activities          
  Increase in Marketable Securities $0 $1 $2 $3 $4
  Sale of Fixed Assets 0 0 0 0 0
  Purchase of New Equipment 0 0 0 0 0
  Other 0 0 0 0 0
  Net Cash Used for Investing Activities $0 $1 $2 $3 $4
Cash Flows from Financing Activities          
  Payment of Mortgage Principal -$29,471 -$32,396 -$35,611 -$39,145 -$43,031
  Transfer From/(To) Parent 0 0 0 0 0
  Other 0 0 0 0 0
  Net Cash from Financing Activities -$29,471 -$32,396      
NET INCREASE/(DECREASE) IN CASH $77,547 $99,564 $110,657 $134,329 $159,413
CASH, BEGINNING OF YEAR 33150 110697 210261 320918 455247
CASH, END OF YEAR $110,697 $210,261 $320,918 $455,247 $614,660

 

2). Residual Income Model

The residual income model has been used to compute the value of the company’s share. The computations are shown below:

Year PV Factor Residual Income X PV Factor
Year + 1 1.1217  $                                       23,950.46
Year + 2 1.2582  $                                       36,675.16
Year + 3 1.4114  $                                       42,701.18
Year + 4 1.5831  $                                       46,169.38
Terminal Value Year 5 & above 1.5831  $                                     766,220.43
  Total RI  $                                     915,716.61
  Beginning BV  $                                       52,000.00
  Total Value  $                                     967,716.61
  Midyear Adjustment 1.0609
  TV After Adjustment  $                                  1,026,604.50

 

The residual income model gives us a value of $1026 million for HES as shown above.

3). FCFF & FCFE

The value of HES using the FCFE and FCFF method is shown below. We have first calculated the WACC and Ke for HES using given inputs and making some assumptions. The market rate of return was not provided, it has been computed using the Gordon growth model and the rate is 20.05%. The average cost of debt and the tax rate has also been computed for HES. The WACC of HES is 7.09% as shown below:

CAPM  
Measures  
Risk Free Rate 2.01%
Beta 0.563
Rm 20.05%
Re 12.17%
   
WACC  
Equity Value 52,000
Value $520,000
Cost of Equity 12.17%
Debt Value 468,000
Cost of Debt 10.03%
Tax Rate 35.00%
WACC 7.09%
   
Growth

 

2%

………….

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