es, how would you explain the low 12. You have collected returns on AnaDone Corporation (AD Corp.), a large, di- versified manufacturing firm, and
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In the face of disappointing earnings(a) Estimate the (after-tax) cost of capital (WACC) for the division.

results and increasingly assertive institutional stockholders, Eastman Kodak considered a major restructuring in 1993. As part of this restructuring, it considered the sale of its health division, which earned $560 million in earnings before interest and taxes in 1993, on revenues of $5.285 billion. The growth in earnings was expected to diminish to 6% between 1994 and 1998 and to 4% thereafter. Capital expenditures in the health division amounted to $420 million in 1993, whereas depreciation was $350 million. Both were expected to grow 4% a year from 1994 onwards. Working capital requirements are negligible. The average beta of firms competing with Eastman Kodak's health division is 1.15. Although Eastman Kodak has a debt ratio (D/(D+E)) of 50%, the health division can sustain a debt ratio (D/(D+E)) of only 20%, which is similar to the average debt ratio of firms competing in the health sector. At this level of debt, the health division can expect to pay 7.5% on its debt, before taxes. The tax rate is 40%, the Treasury bond rate is 7%, and market risk premium is 5.5%.

(b) Estimate the value of the division as at the end of 1993.

(c) Why might an acquirer pay more than this estimated value?..


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2. Financing feedback are those payments which decreases the net income and the retained earnings. Following could be direct cause of financing feedback: I. Issuing additional common stock — Correct, it will decrease the retained earnings. 1]. Purchasing additional buildings with internally generated funds — Incorrect, it won't affect the financing feedback, until or unless purchasing is through loan. 1]]. An unexpected increase in sales — Incorrect, it will not decrease net income, or affect financing feedback. IV. Borrowing fiom the bank — Correct, it will decrease the net income due to increase income expense. Therefore, correct answer is g I and IV . 3. Financing feedback might be: Increase charges against the net income, reducing the amount of available internally generated funds. Therefore, the correct answer is Option B

QUESTION ONE (a) NairobiTech Solutions is a software company located in Nairobi Kenya. The company earned sh. 20 million before Interest and Taxes on turnover of sh. 60 million in 2013. In the year 2013, investment in property, plant and equipment was sh. 10 Million, and Amortization and Depreciation was sh. 6 million. Working capital investment was 5 percent of Turnover. NairobiTech Solutions expect earnings before interest and taxes, investment in property, plant and equipment, investment in working Capital, Amortization and Depreciation and Turnover to grow at 10 percent per year from 2014 to 2023. After year 2023, the growth in sales, earnings before interest and taxes, and working capital investment will decline to stable 3 percent per year, and investment in property, plant and equipment and Amortization and Depreciation will offset each other. NairobiTech Solutions has an effective tax rate of 20 percent. Assume that the weighted average cost of capital is 12 percent during the high growth stage and 8 percent during the stable growth stage. EA. Required: (i) Calculate the Free cash Flow to the Firm for year 2014 (ii) The Free Cash Flow in the year 2024 (iii) Terminal Value in year 2023 (iv) The value of NairobiTech Solutions using the Free Cash Flow to the Firm model ( 30 Marks) manager in the firm, you are

es, how would you explain the low 12. You have collected returns on AnaDone Corporation (AD Corp.), a large, di- versified manufacturing firm, and the NYSE index for five years: Year AD Corp. NYSE 1981 10% 5% 1982 5% 15% 1983 -5% 8% 1984 20% 12% 1985 -5% -5% a. Estimate the intercept (alpha) and slope (beta) of the regression. b. If you bought stock in AD Corp. today, how much would you expect to make as a return over the next year? (The six-month T-bill rate is 6%.) c. Looking back over the past five years, how would you evaluate AD Corp.'s performance relative to the market? d. Assume now that you are an undiversified investor and that you have all of your money invested in AD Corp. What would be a good measure of the risk that you are taking on? How much of this risk would you be able to eliminate if you diversify? e. AD Corp. is planning to sell off one of its divisions. The division under consid eration has assets that comprise half of the book value of AD Corp. and 20% of the market value. Its beta is twice the average beta for AD Corp. (before di- vestment). What will the beta of AD Corp. be after divesting this division? returns of Mapco Inc., an oil- and gas-

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