Scenario afree-cash-flow valuation of equitymake

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Reference no: EM13370079

SCENARIO A





FREE-CASH-FLOW VALUATION OF EQUITY MAKE ENTRIES IN BLUE-COLORED CELLS
Assumptions:





PERIOD 0 1 2 3 4 5
YEAR 2003 2004 2005 2006 2007 2008
Profit from operations (EBIT)
115.0 138.0 165.0 199.0 238.0
Income tax rate
35.0% 35.0% 35.0% 35.0% 35.0%
Depreciation & amortization expense
15.0 16.0 16.0 17.0 17.0
Net working capital from balance sheet forecast 481.0 633.4 760.0 912.0 1094.4 1313.3
Capital expenditures
3.0 3.0 3.0 3.0 2.0
Long-term growth rate




4.0%
Wt-Avg. C of C (K-wacc) 10.8%




Market Value of Debt 57.0




Number of Shares 10.0




Redundant Assets 0.0











PERIOD 0 1 2 3 4 5
YEAR 2003 2004 2005 2006 2007 2008
EBIT after tax (EBIAT)
74.8 89.7 107.3 129.4 154.7
Depreciation   15.0 16.0 16.0 17.0 17.0
Cash Flow from Operations (CFFO)
89.8 105.7 123.3 146.4 171.7
+/- Change in Net Working Capital
152.4 126.7 152.0 182.4 218.9
+/- Capital Expenditures   3.0 3.0 3.0 3.0 2.0
Free Cash Flow (FCF)   (65.6) (24.0) (31.8) (39.1) (49.2)
Terminal Value (TV)           (752.3)
Sum of FCF + TV
(65.6) (24.0) (31.8) (39.1) 843.8







  Present Value 377.3




 Market Value of Debt 57.0
 

 
Valuation of Equity 320.3
 


Redundant assets 0.0




Adjusted Value of Equity 320.3




 Number of Shares 10.0




Value of Equity per Share $32.03




 

SCENARIO B





FREE-CASH-FLOW VALUATION OF EQUITY MAKE ENTRIES IN BLUE-COLORED CELLS
Assumptions:





PERIOD 0 1 2 3 4 5
YEAR 2003 2004 2005 2006 2007 2008
Profit from operations (EBIT)
90.0 95.0 100.0 105.0 109.0
Income tax rate
35.0% 35.0% 35.0% 35.0% 35.0%
Depreciation & amortization expense
15.0 16.0 16.0 17.0 17.0
Net working capital from balance sheet forecast 481.0 498.0 523.0 548.0 576.0 605.0
Capital expenditures
3.0 3.0 3.0 3.0 2.0
Long-term growth rate




2.0%
Wt-Avg. C of C (K-wacc) 10.8%




Market Value of Debt 57.0




Number of Shares 10.0




Redundant Assets 0.0











PERIOD 0 1 2 3 4 5
YEAR 2003 2004 2005 2006 2007 2008
EBIT after tax (EBIAT)
58.5 61.8 65.0 68.3 70.9
+ Depreciation   15.0 16.0 16.0 17.0 17.0
=Cash Flow from Operations (CFFO)
73.5 77.8 81.0 85.3 87.9
+/- Change in Net Working Capital
(17.0) (25.0) (25.0) (28.0) (29.0)
+/- Capital Expenditures   (3.0) (3.0) (3.0) (3.0) (2.0)
=Free Cash Flow (FCF)   53.5 49.8 53.0 54.3 56.9
+Terminal Value (TV)           658.9
=Sum of FCF + TV
53.5 49.8 53.0 54.3 715.8







  Present Value 592.4




- Market Value of Debt 57.0
 

 
= Valuation of Equity 535.4
 


+Redundant assets 0.0




=Adjusted Value of Equity  535.4




/  Number of Shares  10.0 0



Value of Equity per Share $53.54




Q1 Mark Cartwright is trying to sell his business. He asked you, as a GW MBA, to value the business for him, so he can decide how to price it. You ran two scenarios of the forecast, then you ran the FCF VALUATION MODEL for each scenario, A & B above. Reconcile the two scenarios by examining their inputs and outputs, and recommend to Mark how much you think his business is worth. Include a justification based on your analysis and reconcilation of the two scenarios. HINT: How do Scenario A&B assumptions (inputs) differ?

MARKET MULTIPLES (COMPARABLES) VALUATION OF EQUITY MAKE ENTRIES IN BLUE-COLORED CELLS


none none none none Average
Market Multiples of Peers Peer A Peer B Peer C Peer D Peer E Mkt Mult
Price /revenue market multiple of peer company 0.3         0.3
Price/EBITDA market multiple of peer company 12.0         12.0
Price /Earnings market multiple of peer company 14.0         14.0
Mkt Val of Eq/Book Val mkt mult of Equity of peer co 2.4         2.4







Target company data
Target company is Cartwright- the one being valued
Target company revenue 2694.0




Target company EBITDA 86.0 Use EBIT because EBITDA is not given
Target company earnings (net income) 44.0




Target company book value of equity 348.0




Target company number of shares 10.0 Not relevant- no shares outstanding









from col B from Col G  BxC C/B55


Target Co Average Aggregate Per Share  
Valuation Calculations Data Mkt Mult Valuation Valuation  
Valuation based on avg revenue market multiple 2694.0 0.3 808.20 $80.82 See formulas in cells for source of data
Valuation based on avg EBITDA market multiple 86.0 12.0 1032.00 $103.20

Valuation based on avg earnings market multiple 44.0 14.0 616.00 $61.60

Valuation based on avg book value market multiple 348.0 2.4 835.20 $83.52








Summary





   FREE CASH FLOW MODEL SCENARIO A $320,300 from previous tab B32


   FREE CASH FLOW MODEL SCENARIO B $535,400 from previous tab B72


   REVENUE MARKET MULTIPLE $808,200 from E19

 
   EBITDA MARKET MULTIPLE $1,032,000 from E20



   EARNINGS MARKET MULTIPLE $616,000 from E21  


   BOOK VALUE MARKET MULTIPLE $835,200 from E22  









CURRENT MARKET PRICE There is no current market price, this is a small business, its shares are not listed or traded OTC

Q2 After you finished the FCF Valuation (previous tab), you learned of a business similar to Cartwright Lumber that was sold recently to a new owner.

Explain the results of your Market Multiples analysis in the box provided.

Q3 Reconcile the FCF Valuation results with the Market Multiples Valuation results.

Q4  Instead of the FCF Valuation and the Market Multiples Valuation, is it valid to use a simple capitalization formula, such as the formula on page 97 of the Cohen Finance Workbook? Calculate the value of Cartwright using that formula and discuss the implications.

Reference no: EM13370079

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