Reference no: EM132752360
Question: You are valuing a potential target of an LBO. As the target has not been approached yet, the data used for this valuation will be rough at this stage.
The target is a classic manufacturing company from the Midwest. It is listed on the NYSE, with a current market cap., of $4.30B, and CAPM beta of 1.1; our investment bankers estimate it will take a bid of $5.0B to close the deal.
The company has a very stable business, earning a consistent 12.0% return on invested capital, and reinvesting 30% back into the business each year (measured in a traditional FCFF model); both these are expected to continue at this rate for the foreseeable future. Last year, the company earned pre-tax, pre-interest operating profits of $210M. The company's tax rate over last few years has been 20 to 25% - for last year and the future, the rate is expected to be 20%.
The target currently has debt outstanding of $750M, paying interest at a rate of 7.0%.
As I noted above, I will lead you through this problem step-by-step. I will add additional information as we need it so as not to muddy the water.
[We will EVENTUALLY use the relationship VL = VU + ...., thus, we need to estimate VU. Question 1 is the first step in this process - here we will forecast UNLEVERED free cash flow[1] for next year]
a) What is NOPAT for the company for last year?
b) What is FCFF for the company for last year?
c) Measured at the firm level, what is the estimated long-term growth rate for the company (either of invested capital, NOPAT or FCFF, in our model, these are all the same!)?
d) Estimate FCFF for next year.
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