Math/Physic/Economic/Statistic Problems
Unless instructed otherwise, please round off your values to the nearest dollar or % correct to two decimal places and include a comma separator for your numbers.
Question 1 (20 marks)
You are a finance manager of Darwin Brighton, a building materials company (acquiring company) based in Australia. The board is reviewing an opportunity to purchase Hepal, a company that manufactures tiles (target company).
The board has indicated that it will make an offer of $370 million to purchase Hepal. It is reviewing a number of options to finance this purchase, should it go ahead. It is your task to develop a valuation model to help determine if this is a good deal.
Your model will make the following assumptions:
You will make projections for the first five years and then the subsequent years will be summarised using terminal value.
Revenues for the first year is $410 million, increasing by 2% p.a. for the first five years and then 1.2% p.a., thereafter.
COGS for the first year is $150 million, increasing by 1.8% p.a. for the first five years and then 2% p.a., thereafter. Salary expense for the first year is $84 million, increasing by 2.2% p.a. for the first five years and then 2.5% p.a., thereafter.
Office administration expense for the first year is $33 million, increasing by 3% p.a. for the first five years and then 1.5% p.a., thereafter.
The target company owns $580 million worth of fixed assets with an average useful life of ten years, with no salvage value. You will use straight line depreciation (note you will need to calculate the terminal value of the depreciation expense) to estimate the expenses.
You project that the company will require $30 million of capital expenditure in the first four years, and this will reduce to $10 million in the fifth year. There is no expected capital expenditure beyond the fifth year. The corporate tax rate is 30% on company profits.
