Reference no: EM1372310

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.