As an analyst in the valuation team your job is to perform significant financial modeling and analysis. Your company is seeing a new sales strategy that require your input. The strategy will be effective for the upcoming 4 Years. If the company adopts the new strategy, sales will grow at the rate of 15% per year for three years. Other ratios such as: Asset turnover, gross margin, the capital structure and income tax will remain unchanged. However, depreciation would be applicable at 8% of net fixed assets at the starting of the year. Moreover, the target rate of return for the company is 12%. Additional financial information for current year is mentioned below:
Gross Margin (15%)
Admin., selling and Distribution expenses (7%)
Profit before tax
Profit After Taxes
C) Provide detailed comments should the company proceeds with this new strategy or Not? (3 Marks)
This can be solved as shown in the table below.
To get Depreciation, consider the table below.
Value of business year
Value of business year 1
Value of business year 2
value of business year 3
value of business year 4
Therefore, value of business is increasing as well as profit, and because of this, the company should proceed with the new strategy.