 # FinchCo Harvard Case Solution & Analysis

## FinchCo Case Solution

Free Cash Flow:

The company has prepared projected income statements for next three years of 2011, 2012 and 2013 by using necessary estimations and projections. The company expects its revenues of 2011 to increase to the level of 2009 and then to gradually increase at the rate of 7.9% and 3.2% for the years 2012 and 2013 respectively. Finch co also expects an increase in the gross profit margins accordingly at the rate of 33% of the revenues. The cost of sales is likely to remain at the level of 67% of the revenues.
The free cash flows of Finch co. have been calculated on the basis of information provided. The tax rate of 30% has been taken for the purpose of calculation. Also, the capital expenditures are taken to an amount equal to that of depreciation. Thus, the free cash flow of the company for the years 2011, 2012 and 2013 are CD \$1,890,000, \$2,725,000 and \$3,092,000 respectively. These values represent an amount available to company for its expansion or expenditures after capital expenditures.

It can be seen that all the cash flows of the company are positive, which is a good sign because the company will have the funds to cover its expenses and to pay debts. From the investor’s point, it is a healthy sign which somewhat ensures the return on the investment made by the investor.

The company’s EBIT as well as its free cash flows are expected to grow at the rate of 44% and then 13% in the year 2012 and 2013 respectively.The terminal value of \$55 million has also been calculated to value the company. The discount rate has been used of 10.8% for discounting the FCFs to the present value.

Cost of Equity:

Cost of equity is the return which is paid by the company to investors on their share in company’s equity. It incorporates risk that is borne by the investor by investing in the company’s equity. The cost of equity is also a part of WACC together with cost of debt.FinchCo Case Solution

As suggested in the case by Ms. Bhathal, the cost of equity is calculated with debt to equity ratio of 40%. For the purpose of calculation, the data has been taken from a similar firm in the industry namely Toromont industries. The cost of equity has been calculated using CAPM approach. For the purpose of calculation, the market Beta has been taken as 0.8 with market risk premium of 6%. The risk free rate has been taken as 3.6%. The company stands at WACC of 10.8% with the cost of debt equal to 9.6%. The risk free rate is actually the 30 year GOC Bond rate. This is the most risk free rate available to the company.................

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