Estimate the Value of Mercury

Mercury Estimate

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Estimate the Value of Mercury using a discounted cash flow approach

 

    2007 2008 2009 2010 2011
  Revenue $479,329 $489,028 $532,137 $570,319 $597,717
Less: Operating Expenses $423,837 $427,333 $465,110 $498,535 $522,522
Less: Corporate Overhead $8,487 $8,659 $9,422 $10,098 $10,583
  EBIT $47,005 $53,036 $57,605 $61,686 $64,612
Less: Taxes (EBIT*40% tax rate) $18,802 $21,214 $23,042 $24,674 $25,845
    $28,203 $31,822 $34,563 $37,012 $38,767
Add: Depreciation $9,587 $9,781 $10,643 $11,406 $11,954
Less: Capital Expenditures $11,983 $12,226 $13,303 $14,258 $14,943
Less: Increase in Net Working Capital $4,569 $2,648 $9,805 $8,687 $6,234
  Free Cash Flows $21,238 $26,728 $22,097 $25,473 $29,544

 

market rate of return(Km)  = 9.93%

 

   
Growth Rate: 3%

 

WACC: 11.08%
   

 

CAPM =KRF + β(KM – KRF)          
= 4.93+1.6(9.93-4.69)          
= 13.3%          
             
WACC WDCOSTD(1-T) + WSCOSTS        
= .20*.06(1-.40)+.80(.1295)        
= .0072+ .1036          
= 11.08%          
             
Vn    = $29,544 (1+.03) =$376,613        
  (.1108-.03)          
 

 

 

 

 

 

 

           
  2007 2008 2009 2010 2011  
V0 = $21,238 + $26,728 + $22,097 + $25,473 + $29,544 + $376,613
  (1+.1108) (1+.1108)^2 (1+.1108)^3 (1+.1108)^4 (1+.1108)^5 (1+.1108)^5
= $19,120 + $21,662 + $16,122 + $16,732 + $17,470 + $222,698
= $313,804          
             
  Enterprise Value= V0 + Cash0 – Debt0      
  = $313,804-$56,525+$106476      
  = $359,653        

 

 

Mercury enterprise value is $359,653. The cash flow for the years 2007 -2011 should be calculated. It is calculated by adding the free cash to depreciation and then subtracting the capital expenditures and the increase in the net working capital. The values of capital expenditures and depreciation are provided; hence we can find the net increases in the working capital. Differences between the current liabilities and assets are compared to the prior year.

To calculate the CAPM the formulae KRF + β (KM  – KRF ) is applied. It is vital to determine the risk free rate and the beta. The risk rate is 4.69% while the risk free rate is 4.93% and finally the beta was evaluated by the use of the average 1.6. The calculation of these values equate to 12.95 as the capital equity cost.

 

 

 

weighted average cost of capital (WACC)

It was derived by the following formula WD ( Cost (1-T) + WS Costs. the weight of the debt is 20% and the cost of the debt is 6%. the values of tax rate is given as 40% . the cost equity is calculated by using the CAPM and all the input values in WACC are used,

 

The terminal value is used in calculating the present value for the future cash flows. Through substitution in the present value formula the enterprise value is obtained. Finally there is substitution to the formula so as to determine the enterprise value. To obtain enterprise value: V0 debt added to cash are applied. The value of V0 is $313804 and cash is $10,676, debt of $56,525 for the year 2006. The result of the enterprise value $359,653

 

Use of excel

 

 

     year         present value
2007 19120
2008 21662
2009 16122
2010 171470
2011 222698

 

 

The appreciating impact in the graph shows that there is a good return on investment to the company. Tis is due to the fact that after the year 2009 the gradient is steep implying that the company is enjoying good profits.