4\" (25 p.) The management board of the ABC company is thinking of implementing

Question

4" (25 p.) The management board of the ABC company is thinking of implementing a new strategy which entails making certain investment expenses. However, the forecast says that investment would translate into an increase of revenues. Valuation for the company without including the strategy has shown that the value of equity (E) of the ABC company amounts to PLN 5 million. without strategy E (equity) D at beginning of period V (value of indebted company) The accounting balance sheet of ABC company is presented below: 5 000 thousand PLN 200 thousand PLN 5200 thousand PLN Assets Fixed assets Current assets ??. 5 200 Inventories Accounts receivable Cash 900 300 300 300 Total assets 6 100

Explanation / Answer

The above question satisfies all the assumptions of Alcar Model .Hence,

Value of Strategy=Post Strategy Value -Pre Strategy Value

Pre Strategy Value is given to be $5 million

Post Strategy Value is as follows:

4133

PV @12% 1021 151 851

TOTAL PV 2023

FCFF FOR 4th Year and so on=1196

PV=1196/.12=9967

POST STRATEGY VALUE=9967/(1.12)^4+2023=6334+2023=8357=$8.36million

Strategy Value=$8.36-$5=$3.36million .Since NPV positive ,Strategy should be adopted.

Increase in share price=3.36m/1m=$3.36

Particulars 1 2 3 Sales 21000 22222 33333 Less:Cost & Depreciation 16111 18000 28231 EBIT 4889 4222 5102 NO-PAT=EBIT(1-.19)(a) 3960 3420

4133

INVESTMENT IN FIXED ASSETS(b.) 1706 1997 2437 INVESTMENT IN WORKING CAPITAL(c.) 1111 1234 500 FCFF(a-b-c) 1143 189 1196

Related Questions

Navigate

• Browse (All)
• Browse 4
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.