Reference no: EM133075288

Emma Li successfully finished her MBA and now works as the CFO of theFreelancer.com, a major player in the world of online IT outsourcing, with more than 2.9million projects posted on its site. The projects, initially focused on website design, graphicdesign, copywriting, and SEO now also include astrophysics, biotechnology, industrial design,and aerospace engineering.Freelancer.com is preparing an acquisition, and Emma has been required to independentlyvalue the shares of the target firm, Xlance. The CEO, in negotiations currently with theinvestment bank and the target firm, prefers to have this in-house independent valuation asan initial anchor. The target, Xlance, is a startup that grew to have more than a half millionusers, positioning its site in the top ten largest freelance marketplaces in the world. Theacquisition would allow Freelancer.com to expand into new markets and increase its globalfootprint. The investment bank analysts expect Xlance to increase its sales by 6 percentin the long run. Emma has estimated Xlance sales at about $6.2 million in 2021. Xlance'sEBIT is 15% of sales, changes in net working capital requirements are 10% of any changein sales, and capital expenditures equal depreciation expense. Xlance has $1.2 million incash, $1.2 million in debt, and 100,000 shares outstanding. Similar firms have a tax rate of24% and a cost of capital (discount rate) of 15%. From Bloomberg, Emma also found outthat comparable firms in the industry have on average a P/E ratio of 11 and a P/S ratio of1.2. What concerns Emma is that financial analysts in the industry do not converge in theirexpectations of Xlance's growth. A well reputed Toronto-based analyst expects the firm togrow at 10 percent each year for the next 5 years, then continue at 4 percent in the longrun. Another reputed technology analyst based in Stockholm disagrees with these growthprospects in the short term and estimates that a slow economy will cut the business expensesfor technology altogether. Thus she anticipates Xlance will decrease its sales by 5 percentin the next three years, then by 4 and 2 percent in the next two years. Only then does sheestimate that the firm will start increasing its sales, by 3 percent each year in the long run.

1. Help Emma estimate Xlance's future free cash flow to the firm for the next 6 years,using the assumptions of growth indicated by the investment bank. How much shoulda share of Xlance be worth today? (1 point)Hint: In this case you can value the firm with the free cash flow (DCF) approach. Thisapproach is implemented almost identically to the dividend discount model (DDM),except that instead of discounting estimated future dividends, you discount expectedfuture free cash flows. To find the share price using the discounted cash flow approach,follow the steps:

Step 1Calculate the free cash flowFree Cash Flow =EBIT×(1-τc) + Depreciation-Capital Expenditures-Increases in Net Working Capital,where τc is the corporate tax rate.

Step 2Compute the firm valueV0=PV(Future Free Cash Flow of Firm).

Step 3Compute the share priceP0=V0+ Cash0-Debt0Shares Outstanding