Reference no: EM132743010

Finance 375

Week 4 Business Valuation Problem

You are interested in buying a local machine shop business. You have gathered the following information from the current owner and his accountant.

Sales 3 million dollars per year

Cost of goods 1.7 million dollars per year

Cash Expenses 725 thousand dollars per year

Depreciation Expense 125 thousand dollars per year

Cash on the balance sheet 150 thousand dollars

Receivables on the balance sheet 75 thousand dollars

Inventory on the balance sheet 300 thousand dollars

Fixed asset net of depreciation on the balance sheet 450 thousand dollars

Total Current Liabilities on the balance sheet 175 thousand dollars

Total Long Term Debt on the balance sheet 600 thousand dollars

Your required return if you invest in this business is 20 percent. This is the figure you will use to calculate the present value of EBITDA.

You will also buy the receivables and inventory from the current owner. But you will not buy the cash on the balance sheet. You will assume all current liabilities and all total long-term debt of the business.

Assignment:

1. Create an income statement (down to EBIT) and a balance sheet using the data provided above. The balance sheet should include total assets and total liabilities and equity. Use the format for these statements that is shown in the example within the week four online lecture A Simple Way to Value a Business.

2. Calculate EBITDA for this business.

3. Calculate the business value for this business using the formula in the week four online lecture A Simple Way to Value a Business. There is an example in this lecture that should be carefully studied.

Clearly identify each problem with the number 1, 2, or 3 associated with it. This makes it possible to grade your problems.

Please submit your work as an excel file.