- 10 Marks
Question
UTFM Ltd is experiencing financial difficulties, and management is prepared to undertake a buyout. UTFM Ltd is considering selling the business for GH¢50 million. After an analysis, management concluded that the company requires a capital injection of GH¢30 million. A Venture Capitalist has agreed to raise the required funds, providing GH¢8 million at 10% interest and GH¢7 million in equity. Management will provide the remaining funding as equity.
Forecasted Earnings Before Interest and Tax (EBIT) for the next 5 years are as follows:
Corporation tax is charged at 25%, and dividends are expected to be no more than 10% of profits for the first five years. Management forecasts that the value of equity capital is likely to increase by approximately 15% per annum for the next 5 years.
Required:
On the basis of the above forecasts, determine whether management’s estimate that the value of equity will increase by 15% per annum is a viable one.
Answer
Conclusion:
The actual growth rate of equity is 14.60% per annum, which is slightly below the management’s target of 15%. Therefore, while the growth is close, the estimate of 15% per annum growth is not fully viable based on the given forecast.
- Tags: Buyout, EBIT, Equity Valuation, Growth Estimation, Venture Capital
- Level: Level 3
- Topic: Business reorganisation
- Series: MAY 2018
- Uploader: Theophilus