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# Question: Question 1 A private equity analyst is valuing a company that is expected to generate sales from year 1

Question: Question 1 A private equity analyst is valuing a company that is expected to generate sales from year 1 onwards as given in Table 1. Table 1 Year 1 Year 2 Year 3 Year 4 Year 5 €45,000 €52,000 €57,500 €62,500 €68,800 . Expected EBIT margin (% sales) in year 1 is 6%. Additional assumptions are: EBIT margin (% sales): increases 35 basis points (0.35%) per year

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Show transcribed image textTranscribed image text: Question 1 A private equity analyst is valuing a company that is expected to generate sales from year 1 onwards as given in Table 1. Table 1 Year 1 Year 2 Year 3 Year 4 Year 5 €45,000 €52,000 €57,500 €62,500 €68,800 . Expected EBIT margin (% sales) in year 1 is 6%. Additional assumptions are: EBIT margin (% sales): increases 35 basis points (0.35%) per year until year 3, including year 3, and increases 15 basis points (0.15%) per year in years 4 and 5 Depreciation: 6% of sales, each year Recurrent Capex: 7.5% of sales for year 1, with this percentage decreasing 35 basis points (0.35%) per year until year 4 Change in working capital: 9% of yearly change of sales . Tax rate: 25% Target capital structure: debt/(debt equity) ratio of 55% Asset beta: 1.25 . Risk-free rate: 2% Equity risk premium: 6% . Debt spread: 4% . Expected net debt at the end of year 1: € 4,000 Expected financial investments at the end of year 1: € 3,500 • Expected minority interests at the end of year 1: € 2,500 Number of shares: 5,000 . To answer the following questions, make plausible assumptions if necessary. In case you prefer, standard characters can be used (e.g., b rather than B, capital_sigma rather than I). a. Compute the Free Cash Flows to the Firm (FCF) for the period from year 1 until year 5, including year 5. Explain your answer. © Queen Mary University of London, 2022 Page 2 ECOM118 (2022) [10 marks] “Continues on next page… b. Consider the following statement: “When computing the FCF, taxes are estimated in a way that financing decisions are considered”. Do you agree? Explain your answer. (10 marks] Given the target capital structure and the set of assumptions renorted below Table 1 what is

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