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Hongxing Auto Sales and Service Co Case Solution

Solution Id Length Case Author Case Publisher
1321 1039 Words (5 Pages) James E. Hatch, Yuan Shi, Wei Sun Ivey Publishing : 909N31
This solution includes: A Word File A Word File and An Excel File An Excel File

There are multiple risks associated with the discounted cash flows which are inherently present in the projection of cash flows. Firstly, the capital expenditures are projected for the calculation of free cash flows. As the number of periods increases, the uncertainty increases and hence the cash flows face large exposure. Secondly, the calculation of the discount rate is also risky in the discounted cash flow analysis. The weighted average cost of capital and the capital asset pricing model both techniques are quite theoretical and may not work in the real world. Another risk associated with the discount rate is the usage of growth in the dividend discount model. The growth rate which is used in dividend discount model is on a perpetual basis. The problem with this is again that anything in perpetual basis is strictly theoretical and may differ in the real practical world. Therefore, the discounted cash flows fluctuate significantly as they are predominantly dependent upon the assumptions which are made to project the cash flows. Therefore, assumptions must be realistic.

Following questions are answered in this case study solution

  1. 5 Years Pro forma Set of Financial Statements

  2. Five years Free Cash Flow and DCF Analysis

  3. Discuss risk factors and their impact on your valuation.

  4. Document and justify your calculation of terminal value.

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Case Analysis for Hongxing Auto Sales and Service Co Case Solution

1. 5 Years Pro forma Set of Financial Statements

Assumptions

Business Tax (5% of Service Revenue)

5%

Tax Rate

33%

GDP Growth Rate

13.0%

 

             

Performa Income Statement

2005

% of Sales

2006

2007

2008

2009

2010

 

Y

 

Y

Y

Y

Y

Y

Sales

12,009,590

 

13,570,837

15,335,045

17,328,601

19,581,320

 22,126,891

Sales Revenue

8,535,166

71%

9,644,738

10,898,553

12,315,365

13,916,363

15,725,490

Service Revenue

3,474,424

29%

3,926,099

4,436,492

 5,013,236

5,664,957

6,401,401

Business Tax (5% of Service Revenue)

173,721.20

 

196,305

221,825

250,662

283,248

320,070

Cost of Goods Sold

9,182,252

76%

10,375,945

11,724,818

13,249,044

14,971,420

16,917,704

Gross Margin

2,653,617

 

 2,998,587

3,388,403

3,828,896

4,326,652

4,889,117

Operating Expenses

 

 

 

 

 

 

 

Salaries, Wages & Benefits

378,000

3%

427,140

482,668

545,415

616,319

696,440

Telephone, Heat, Taxes

49,000

0%

55,370

62,568

70,702

79,893

90,279

Advertisement

70,000

1%

79,100

89,383

101,003

114,133

128,970

Insurance, Legal, Accounting

125,000

1%

141,250

159,613

180,362

203,809

230,304

Repairs, Maintenance, Tools & Supplies

23,000

0%

25,990

29,369

33,187

37,501

42,376

Office Expense & Travel

22,000

0%

24,860

28,092

31,744

35,870

40,534

Truck Operations

73,000

1%

82,490

93,214

105,331

119,025

134,498

Bad Debt

              8,000

0%

9,040

10,215

11,543

13,044

14,739

Depreciation

56,000

0%

63,280

71,506

80,802

91,307

103,176

Total Operating Expense

804,416

7%

908,520

1,026,628

1,160,089

1,310,901

1,481,318

Earnings Before Interest & Taxes

1,849,201

 

2,090,067

2,361,776

2,668,807

3,015,751

3,407,799

Interest

33,480

 

200,000

200,000

200,000

200,000

200,000

Earnings Before Taxes

1,815,721

 

1,890,067

2,161,776

2,468,807

2,815,751

3,207,799

Income Taxes

599,188

 

623,722

713,386

814,706

929,198

1,058,574

Net Income After Interest & Taxes

1,216,533

 

1,266,345

1,448,390

1,654,100

1,886,553

2,149,225

Retained Earnings Beginning

2,235,349

 

3,251,882

3,025,882

2,770,502

2,481,922

2,155,828

Dividend

200,000

2%

226,000

255,380

288,579

326,095

368,487

Retained Earnings Closing

3,251,882

 

 3,025,882

2,770,502

2,481,922

2,155,828

1,787,341

 

Performa Balance Sheet

 

 

 

 

 

 

 

 

 

2005

% Of Assets

2006

2007

2008

2009

2010

 

Assets

Y

 

Y

Y

Y

Y

Y

 

Current Assets

 

 

 

 

 

 

 

 

Cash & Bank Deposit

1,590,020

29.8%

1,709,272

1,837,467

1,975,277

2,123,423

2,282,679

 

Accounts Receivable

485,467

9.1%

521,877

561,018

603,094

648,326

696,951

 

Inventories

 

0.0%

                  -  

                  -  

                  -  

                  -  

                  -  

 

Cars for Sale

598,605

11.2%

643,500

691,763

743,645

799,419

859,375

 

Work in Progress

166,583

3.1%

179,077

192,507

206,946

222,466

239,151

 

Prepaid Expenses

149,900

2.8%

161,143

173,228

186,220

200,187

215,201

 

Purchase Rebate Receivable

159,657

3.0%

171,631

184,504

198,341

213,217

229,208

 

Deposit with Supplier

17,995

0.3%

19,345

20,795

22,355

24,032

25,834

 

Other Current

5,294

0.1%

5,691

6,118

6,577

7,070

7,600

 

Total Current Assets

3,173,521

 

3,411,535

3,667,400

3,942,455

4,238,139

4,556,000

 

Non-Current Assets

 

 

 

 

 

 

 

 

Land

1,700,000

31.8%

1,827,500

1,964,563

2,111,905

2,270,298

2,440,570

 

Building

310,311

5.8%

333,584

358,603

385,498

414,411

445,492

 

Equipment & Furniture

8,678

0.2%

9,329

10,029

10,781

11,589

12,458

 

Automotive Equipment

20,707

0.4%

22,260

23,930

25,724

27,654

29,728

 

Other

389

0.0%

418

450

483

519

558

 

Total

2,040,085

 

2,193,091

2,357,573

2,534,391

2,724,471

2,928,806

 

Good Will

123,935

2.3%

133,230

143,222

153,964

165,511

177,925

 

Total Assets

5,337,541

 

5,737,857

6,168,196

6,630,811

7,128,121

7,662,730

 

Liabilities & Equity

 

 

 

 

 

 

 

 

Bank Loan

 

 

 

 

 

 

 

 

Accounts Payable & Accruals

474,950

8.9%

969,463

1,512,063

2,107,789

2,762,241

3,481,648

 

Taxes Payable

810,709

15.2%

871,512

936,876

1,007,141

1,082,677

1,163,878

 

Current Long Term Debt

 

 

 

 

 

 

 

 

Dividend Payable

200,000

3.7%

226,000

255,380

288,579

326,095

368,487

 

Total Current Liabilities

1,485,659

 

2,066,975

2,704,319

3,403,510

4,171,012

5,014,012

 

Long Term Debt

600,000

11.2%

645,000

693,375

745,378

801,281

861,378

 

Shareholders’ Equity

 

 

 

 

 

 

 

 

Common Stock Retained Earnings

3,251,882

 

3,025,882

2,770,502

2,481,922

2,155,828

1,787,341

 

Total Liabilities & Equity

5,337,541

 

5,737,857

6,168,196

6,630,811

7,128,121

7,662,730

 

Performa CF

2006

 2007

  2008

2009

2010

 

                                                     Y

Y

Y

Y

Y

Cash Flow from operating activities

                                                           3,025,882

    2,770,502

    2,481,922

    2,155,828

    1,787,341

 

 

 

 

 

 

Cash Flow from Investing Activities

                                                         (2,193,091)

  (2,357,573)

  (2,534,391)

  (2,724,471)

  (2,928,806)

 

 

 

 

 

 

Cash Flow from Financing Activities

876481.075

1424538.29

2027745.7

2692065.53

3424144.55

 

 

 

 

 

 

Total Cash

                                                           1,709,272

    1,837,467

    1,975,277

    2,123,423

    2,282,679

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