Scenario afree-cash-flow valuation of equitymake

Assignment Help Financial Management
Reference no: EM13370079

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.

Reference no: EM13370079

Questions Cloud

1what is opportunity cost explain with the help of an : 1.what is opportunity cost? explain with the help of an example why assumption of constant opportunity cost is very
Database systems1 list the acid properties explain the : database systems1. list the acid properties. explain the usefulness of each.2. consider the following two transactions
It inventory database given a school system database with : it inventory database given a school system database with over 2000 computers 100 elmos 200 smartboards 200 projectors
Policy brief medicaid expansionassume you are working in : policy brief medicaid expansionassume you are working in the governors office of lsquoyour state. you have now been
Scenario afree-cash-flow valuation of equitymake : scenario afree-cash-flow valuation of equitymake entries in blue-colored
Brody rode his bike 70 miles in 4 hours he rode at an : brody rode his bike 70 miles in 4 hours. he rode at an average speed of 17 mph for t hours and at an average rate of
Part i 1 assuming that claimants exhibit is the entire : part i 1. assuming that claimants exhibit is the entire agreement between the parties related to the coffee sale and
Culturecounter-culturesubculture a critical : culturecounter-culturesubculture a critical argumentobjectivesbullto formulate an original complex thesis about a
Computer graphicsdevelop a simple interactive : computer graphicsdevelop a simple interactive two-dimensional spaceship deck plan editor using opengl and glut. your

Reviews

Write a Review

Financial Management Questions & Answers

  You have just graduated and one of your favorite courses

you have just graduated and one of your favorite courses was financial management.nbsp while you were in school your

  What are sec financials required to adhere

What are companies registered with the Securities & Exchange Commission (SEC) required to include with their financial reports and what are SEC financials required to adhere to?

  Evaluate the required monthly mortgage payment

Evaluate the required monthly mortgage payment for Mr. Davidson and construct the 2014~2018 amortization table for Mr. Davidson.

  Does arbitrage destabilize foreign exchange markets

Does arbitrage destabilize foreign exchange markets and arbitrage can be loosely defined as capitalizing on a discrepancy in quoted prices by making a riskless profit

  State free cash flows are expected to grow at constant rate

Estimate the fair market value of Walleye Feeders at the end of 2012. Assume that after 2015, free cash flows are expected to grow at a constant rate of 12.5% and Walleye Feeders' weighted-average cost of capital is 14 percent.

  Trent fixtures stock without the new production line

calculate the NPV of each Well and recommend whether or not the company should undertake the investment and what is the value of the growth opportunities that the new line offers?

  Explain how much self-employment income

Frank owns 100% of the stock of Sands, Inc. (a C corporation). In a tax year, Sands, Inc. has income before tax = $1,500,000. This is after Sands paid Frank a salary = $350,000. Sands, Inc. also paid dividends = $100,000. Sands is Frank's only sou..

  What can be said about first-order autocorrelation

What can be said about first-order autocorrelation given the Durbin-Watson value of 1.8911 calculated from the three factor model residuals?

  Calculate the expected value of the net present value

Determine the Standard Deviation about the Expected Value and calculate the Expected Value of the Net Present Value - what is the probability that the present value index will be 1 or less

  Define home mortgage securities

James Fromholtz is considering whether to invest in a newly formed investment fund. The fund's investment objective is to acquire home mortgage securities at what it hopes will be bargain prices

  Describe the dividend-discount model

The Dividend-Discount Model can be used to determine the value of a firm's equity-i.e., the current price of a share of stock. We will use this model to estimate the value of a share of your firm's stock and compare this estimate to the current ma..

  What is their yield to maturity

Interest is paid annually, the bonds have a $1,000 par value, and the coupon interest rate is 10%. The bonds sell at a price of $850. What is their yield to maturity?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd