MINI CASE-ch-1
MINI CASE-ch-1
MINI CASE-ch-1
Lo-Tech’s shareholders have voted to cease its diversification strategy and refocus on its core
businesses. As a part of this process, the company is seeking to divest HI-Tech its start-up high
–technology subsidiary. George, Investment banker has been approached by the management
of Hi-tech who want to purchase the company. He decides to value Hi-Tech using the NPV
method. George and Hi-tech management have agreed on the following’s projections:
The company has $100 million of NOLs that can be carried forward and offset against future
income. In addition, hi-tech is projected to generate further losses in its early years of operation
that it will also be able to carry forward. The tax rate is 40%. The average unlevered beta of
five comparable high-technology companies is 1.2. hi-tech has no long-term debt Treasury
yields for ten-year bonds are 6%. capital expenditures requirements are assumed to be equal to
depreciations. The market risk premium is assumed to be7.5%.Net working capital
requirements are forecast as 10% of sales. EBIT is projected to growat3% per year in perpetuity
after year 9.
Calculate WACC and Terminal value and FCFM.