Reference no: EM132183801

Assignment - Horizon value (valuation using perpetuity based and capitalization methods)

In this assignment, you use horizon value calculation methods to estimate the current market value of a privately held company.

Part 1. Calculating capitalization rates

Select a non-financial company for which financial information is available for several fiscal years. Obtain financial statements for at least the three most recent years. Use the selected company's financial statements, together with other information described, to calculate the values indicated in questions 1-4.

Perpetuity based valuation method

1a. Estimate a growth rate for the company. Use any appropriate method, such as the average of several years' growth rates for sales (or total revenue), the average of several years' growth rates in net income (or operating income), or the average dividend growth rate. Specify how you determine the growth rate.

b. Estimate the required return for the company using the capital asset pricing model if beta is available for the company (assume the risk free rate is 1% and the expected market return, 12%). If beta is not available, use the company's average annual stock return for the last three years as the required return.

c. Use the answers to parts a and b to calculate the capitalization rate, ("cap rate").

Valuation estimated by capitalizing an operating variable

2a. Select an appropriate income statement line item from which to estimate a capitalization rate for an operating variable. E.g., net income can be used to calculate the price earnings ratio; total revenue, to calculate the price to sales ratio; total cash flow, to calculate the price to cash flow ratio; and etc.

b. Find the value of the selected operating variable in the company's financial statements for the most recent year.

c. Find the value of the company's equity (market capitalization or price per share * number of shares outstanding).

d. Using 2b and c, calculate the "price to operating variable" ratio (a multiplier that can be used to estimate the market value of comparable companies).

e. Convert the value in d to a "cap rate".

Valuation estimated by capitalizing an asset

3a. Select an appropriate balance sheet line item from which to estimate a capitalization rate for a non-operating, financial variable. E.g., book value of equity can be used to calculate the price to book value ratio; total assets, to calculate the price to total assets ratio; and etc.

b. Find the value of the selected asset in the company's financial statements for the most recent year.

c. Using 2c and 3b, calculate the "price to asset" ratio (a value that can be used to estimate the market value of comparable companies).

d. Convert the value in c to a "cap rate".

Valuation estimated using a non-financial asset

4a. Find the number of employees for the company for the most recent fiscal year.

b. Using 2c and 4a, calculate the "price to employee ratio" (a multiplier that can be used to estimate the market value of comparable companies).

c. Convert the value in b to a "cap rate".

Part 2. Using capitalization rates and industry multipliers to estimate the market value of a privately held company.

Generally, the term "cap rate" refers to a value used to estimate a company's market value based on the company's net income (or EBIT). However, the multipliers and cap rates in 1c, 2d and 3, 3c and d, and 4b and c can be used to estimate the market value of a company based on the value of the variable those multipliers or cap rates are based on. Data for a hypothetical non-public company is attached below.

5a. Using the value from question 1c as a proxy for the industry value, estimate the value of the private company assuming its required return and cash flow growth are the same as the industry's.

b. Use the value from 2d or e as a proxy for the industry multiplier or capitalization rate and estimate the market value of the private company.

c. Use the value from 3c or d as a proxy for the industry multiplier or capitalization rate and estimate the market value of the private company.

d. Use the value from 4b or c as a proxy for the industry multiplier or capitalization rate and estimate the market value of the private company.

6. Briefly discuss the differences in values obtained in question 5 using the different methods, and indicate which value(s) are likely to be most accurate for a firm in the industry of your selected firm.

Attachment:- Assignment File.rar