CHAT GLOBAL Harvard Case Solution & Analysis

CHAT GLOBAL Case Solution

Chat Global

The company has $450 of perpetual income before interest and taxes. The company’s capital structure consists of 75% debt and 25% equity. The Tax rate is 40% and the interest which the company has to pay is 8%, consist of the Risk Free rate. The analyst was required the company’ annual cash flows, Annual debt schedule, terminal value estimates and annual discounting. The most appropriate techniques have been used in the spread sheet in order to get the most probable results. All the solutions which have been made for the question will be addressed in the next section.

Annual Cash Flows

Appendix 1 show the amount of annual cash flow. From that table it can be seen calculations have been made for 4 years. In all the years the company has $450 of perpetual EBIT, afterwards the interest of 8% which is assumed by the Risk Free Rate has been charged which shows a balance of $36.00. furthermore, the EBT has been calculated by subtracting the interest expense from the EBIT and it is showing a figure of $414. In addition, tax of 40% has been charged to this amount which equals to a balance of $165.60. finally, the net income was calculated by subtracting the tax amount from EBT and the Net income became $248.40. however, the depreciation expense is assumed as 0 since, no information has been given to calculate it. While the capital expenditures are also 0 because the company is not purchasing any asset. Furthermore, the change in working capital is also 0 as mentioned in the requirement. From these analysis, it can be said that the company is paying too many expenses as the inflow of $450 has become$248.40 till net income.

Moving forwards with the available cash flows, they are equal to the net income since, there are no non fund expense available to be added back in the net income. However, concerning with the Equity cash flows, it is showing a negative amount of $3678.79 since, the formula (NI+Depreciation expense- capital expenditure – change in working capital – net borrowings) has been used and the debt ratio is very high in the capital structure that’s why the Equity Cash flows are showing negative balance. As far as same values in all years are concerned, the inflows are constant in all the years and that’s the reason behind same balance in all the years....................

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