You are an investment analyst at FI Investments tasked to value FBC firm a Southern Agricultural Conglomerate. The following financial information was recently released for FBC. The company’s 2018 and 2017 annual financial reports are contained in tables 1 and 2 below, along with important additional information: Table 1: FBC statement of financial position (R millions) 2018 2017 Cash and equivalents R149 R83 Accounts receivable 295 265 Inventory 275 285 Total current assets R719 R633 Total fixed assets 3 909 3 856 Accounts payable 228 220 Notes payable 0 0 Total current liabilities 228 220 Long term debt 1 800 1 650 Total liabilities and shareholders equity 3 909 3 856 Number of shares outstanding (millions) 100 100 Additional information: Depreciation (2018): R483. The firm spent R250m in profitable projects during the course of 2018 WACC : 15% Cost of equity of the firm: 10% Tax rate : 40% Table 2: FBC statement of comprehensive income (R millions except for share data) 2018 2017 Total revenues R3 175 R3 075 EBIT 495 448 Interest expense 104 101 Net Income 235 208 Dividends per share R0.80 R0.80 Use the information given, to answer the following: Calculate the Free Cash Flow to the Firm (FCFF) for the year 2018. You are told that the Free Cash Flow to Equity (FCFE) of the firm will continue to grow at a rate of 5% for the next 3 years, after which it will stabilize to a rate of 3%. Calculate the intrinsic value of each of FBC’ shares. 9 (Use 2.d.p in your calculations & final answer for this question)

Financial Accounting

15th Edition

ISBN:9781337272124

Author:Carl Warren, James M. Reeve, Jonathan Duchac

Publisher:Carl Warren, James M. Reeve, Jonathan Duchac

Chapter15: Investments And Fair Value Accounting

Section: Chapter Questions

Problem 2CP

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You are an investment analyst at FI Investments tasked to value FBC firm a Southern Agricultural Conglomerate. The following financial information was recently released for FBC. The company’s 2018 and 2017 annual financial reports are contained in tables 1 and 2 below, along with important additional information:

Table 1: FBC statement of financial position (R millions)

	2018	2017
Cash and equivalents	R149	R83
Accounts receivable	295	265
Inventory	275	285
Total current assets	R719	R633

Total fixed assets	3 909	3 856

Accounts payable	228	220
Notes payable	0	0
Total current liabilities	228	220

Long term debt	1 800	1 650

Total liabilities and shareholders equity	3 909	3 856
Number of shares outstanding (millions)	100	100

Additional information:

Depreciation (2018): R483.
The firm spent R250m in profitable projects during the course of 2018
WACC : 15%
Cost of equity of the firm: 10%
Tax rate : 40%

Table 2: FBC statement of comprehensive income

(R millions except for share data)

	2018	2017
Total revenues	R3 175	R3 075
EBIT	495	448
Interest expense	104	101
Net Income	235	208
Dividends per share	R0.80	R0.80

Use the information given, to answer the following:

Calculate the Free Cash Flow to the Firm (FCFF) for the year 2018.
You are told that the Free Cash Flow to Equity (FCFE) of the firm will continue to grow at a rate of 5% for the next 3 years, after which it will stabilize to a rate of 3%. Calculate the intrinsic value of each of FBC’ shares. 9 (Use 2.d.p in your calculations & final answer for this question)

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