As an analyst in the valuation team your job is to perform significant financial modeling and analysis. Your company is seeing a new sales strategy that require your input. The strategy will be effective for the upcoming 4 Years. If the company adopts the new strategy, sales will grow at the rate of 15% per year for three years. Other ratios such as: Asset turnover, gross margin, the capital structure and income tax will remain unchanged. However, depreciation would be applicable at 8% of net fixed assets at the starting of the year. Moreover, the target rate of return for the company is 12%. Additional financial information for current year is mentioned below: Income Statement Sales 50,000 Gross Margin (15%) 7,500 Admin., selling and Distribution expenses (7%) 3,500 Profit before tax 10,000 Tax (35%) 3,500 Profit After Taxes 6,500 Balance Sheet Fixed Assets 17,000 Current Assets 12,000 Equity 25,000
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As an analyst in the valuation team your job is to perform significant financial modeling and analysis. Your company is seeing a new sales strategy that require your input. The strategy will be effective for the upcoming 4 Years. If the company adopts the new strategy, sales will grow at the rate of 15% per year for three years. Other ratios such as: Asset turnover, gross margin, the capital structure and income tax will remain unchanged. However,
|
Income Statement |
|
|
Sales |
50,000 |
|
Gross Margin (15%) |
7,500 |
|
Admin., selling and Distribution expenses (7%) |
3,500 |
|
Profit before tax |
10,000 |
|
Tax (35%) |
3,500 |
|
Profit After Taxes |
6,500 |
|
Balance Sheet |
|
|
Fixed Assets |
17,000 |
|
Current Assets |
12,000 |
|
Equity |
25,000 |
- Determine value of business before adoption of new strategy?
- What will be the incremental value and value of business after adoption of this new strategy?
- Provide detailed comments should the company proceeds with this new strategy or Not?
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