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FINANCE - SVA Exercise




Question;Do the following SVA Exercise;The following;information is given;* Baseline (last;year) sales: $200 million;* Sales growth;rates: Base year = 15% with a fade rate of 1% a year for years 1-10;(increasing sales due to sustained competitive advantage and a differentiated;product)[source: Strategic Plan]. Fade rate is the rate of decline per year;from a base year.;* Sales growth rate;in year 10 and forward: 5% (in year 11, the competition has caught up and the;market has reached maturity) [source: Strategic Plan];* Profit margin;Base year = 20%, with a fade rate of 1% a year for years 1-10: (during the;period of competitive advantage, the firm can charge higher prices, but its;profit margin slowly declines as competition increases) [source: Strategic;Plan];* Profit margin in;year 10 and going forward: 10% [source: Strategic Plan];* Fixed capital;investment rate: 20% (for every dollar of new sales, we need an additional;investment in fixed plant & equipment of $.20) [source: historical;relationship];* Working capital;investment rate: 5% (for every dollar of new sales we need an additional;investment in inventories & receivables of $.05) [source: historical;relationship];* Cash tax rate;40% [source: historical relationship];* Cost of capital;11% [source: current yield on firm's debt & the cost of equity estimated;using the Capital Asset Pricing Model, weighted average based on the target;capital structure];* Marketable;securities: $15 million;* Market value of;firm's debt: $50 million;* The firm has 5;million shares of common stock outstanding selling at;**scenario 1 =;$40/share and;**scenario 2 =;$60/share.;As indicated, the;values assigned to drivers link directly to the strategic plan and the;associated strategic analysis. In arriving at these estimates strategic;alternatives have been evaluated for their value creation potential, with the;set of strategies selected that create the most shareholder wealth.;1. What is the PV;of operating cash flows over the competitive advantage period?;2. What is the;residual value of the firm after the period of competitive advantage?;3. What is the;value of the firm's equity?;4. Compare the;market value of equity ($40/share) with the estimate provided by SVA for;scenario 1. What recommendations would you make to top management based on your;analysis? Now compare the market value of equity ($60/share) with your SVA;estimate. What would you recommend now?


Paper#49447 | Written in 18-Jul-2015

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