Scenario afree-cash-flow valuation of equitymake

Assignment Help Financial Management
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

Questions Cloud

1what is opportunity cost explain with the help of an : 1.what is opportunity cost? explain with the help of an example why assumption of constant opportunity cost is very
Database systems1 list the acid properties explain the : database systems1. list the acid properties. explain the usefulness of each.2. consider the following two transactions
It inventory database given a school system database with : it inventory database given a school system database with over 2000 computers 100 elmos 200 smartboards 200 projectors
Policy brief medicaid expansionassume you are working in : policy brief medicaid expansionassume you are working in the governors office of lsquoyour state. you have now been
Scenario afree-cash-flow valuation of equitymake : scenario afree-cash-flow valuation of equitymake entries in blue-colored
Brody rode his bike 70 miles in 4 hours he rode at an : brody rode his bike 70 miles in 4 hours. he rode at an average speed of 17 mph for t hours and at an average rate of
Part i 1 assuming that claimants exhibit is the entire : part i 1. assuming that claimants exhibit is the entire agreement between the parties related to the coffee sale and
Culturecounter-culturesubculture a critical : culturecounter-culturesubculture a critical argumentobjectivesbullto formulate an original complex thesis about a
Computer graphicsdevelop a simple interactive : computer graphicsdevelop a simple interactive two-dimensional spaceship deck plan editor using opengl and glut. your

Reviews

Write a Review

Financial Management Questions & Answers

  Problem 130 year monthly mortgage was 450000 with annual

problem 130 year monthly mortgage was 450000 with annual interest rate of 5.what is the principal for first year

  Explain the bond its yield-to-maturity has decreased

A bond with annual coupon rate of 5.10% and price of $1,090 just yesterday paid a coupon. A total of 23 coupons remain to be paid. Suppose you buy the bond at today's price, hold it and receive 8 coupons

  Purchasing and procurement management

Do you feel that the fixed price contract agreed to by FRC was the best way to procure ACME's computer system and where did FRC go wrong in purchasing the software system

  State the expected return on an investment in duncan''s stock

The Duncan Company's stock is currently selling for $15. People generally expect its price to rise to $18 by the end of next year. They also expect that it will pay a dividend of $0.50 per share during the year. What is the expected return on an i..

  Explain what is the firm''s wacc using market value weights

Hare Enterprises has 1.5 million shares of common stock outstanding and the only debt on their balance sheet consists of 50,000 of the 5% coupon bonds listed above

  Describe advantages and disadvantages of choice you made

Would you seek to acquire a company within the European Union or outside of it and describe the advantages and disadvantages of the choice you made.

  Single currency for the world would be beneficial

International trade agreements eliminate trade barriers between countries, promote investments, infuse competitiveness, enhance productivity, create jobs, and provide consumers with a greater range of options at cheaper prices.

  How economic conditions affect the default risk premium

Do you think the default risk premium will likely increase or decrease during the next 6 months? How do you think the yield curve will change during this time? Offer some logic or current reference(s) to support your answers.

  What is dengs wacc

Deng Inc. has a target debt-equity ratio of 0.4. It's before-tax  cost of equity is 16 %  and it's before-tax cost of debt is 8%. If the tax rate is 32%, what is Deng's WACC?

  Prepare a report for the managing director

Prepare a report for the managing director both outlining the theoretical arguments and explaining the real-world influences on the gearing levels of firms.

  Campc is a 5-year old chain of 12 medium-sized supermarkets

campc is a 5-year old chain of 12 medium-sized supermarkets. the supermarkets are targeting the middle- and top-income

  Determine ratios relating to profitability and liquidity

Determine suitable ratios relating to profitability, liquidity, efficiency and gearing.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd