Question

Lori, the sole shareholder of Zenlon Inc., has been approached to sell her business. She has come to you for some advice on the value of her company. Below is some information that she has gathered:

Sales	$4,900,000
Operating expenses	(3,800,000)
Amortization	(200,000)
Operating income	900,000
Interest expense	(150,000)
Income taxes	(190,000)
Net income	$560,000
Sustaining capital investment	$250,000
PV of tax shield on sustaining capital investment	24,000
PV of tax shield on existing UCC balances	65,000
Cost of capital for her business	25%
Terminal growth rate	2%
Income tax rate	25%

Using the discounted cash flow approach, what is the enterprise value for Zenlon Inc.?

Question 21 options:

a)	$2,017,200

b)	$2,461,000

c)	$2,604,300

d)	$2,669,300

Answer 1

Answer is c) $2604300

	Particulars					Amount
	Net Income After Tax					$       5,60,000
	Add: Amortisation(Non Cash Expense)					$       2,00,000
					Net	$       7,60,000
	Less: Sustaining Capital Investment					$       2,50,000
					Net	$       5,10,000
	Add: PV of tax shield on sustaining capital inv.					$ 24,000
	Add: PV of tax shield on existing UCC balances					$ 65,000
					Net	$       5,99,000
	Enterprise Value			= Discounted Annual Cash Flow/(Cost of Capital - Growth Rate)
				=$599000/(0.25-0.02)
				=$2604300