Third capital ventures private equity firm

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Reference no: EM131898671

Slocumb Industries Inc. is a new start up firm created by a private equity spin-off from Third Capital Ventures a private equity firm. The firm is known for its high tech communications/ artificial intelligence capability and is based in Austin, Texas.

At this point Terafly Inc. (consulting firm) estimates that unit sales likely will come in at 76,347, 79,682, 86,623, 88,339 and 94,717 units respectively for the next five years if the company adheres to an average sales price of $267 per unit for the first three years and $284 in years four and five. Thereafter growth in unit sales are expected to be 3.5% indefinitely. Due to the nature of the sub-sector of the high-tech industry the firm resides in, the company concentrates its efforts on a single product line.

After the results of an internal company analysis by the Corporate Finance staff, it has been determined that the company can manufacture its product line at a variable cost per unit expected to be $113 growing at 3.25% per year for the first 5 years and 3.75% per year indefinitely thereafter while overall fixed costs are estimated to be $6,230,300 annually for the first year and then grow 2.75% per year indefinitely.

The necessary capital expenditures are projected to be $17,387,500 upfront and due to the nature of the investments that Slocumb makes, it is deemed by the IRS to be depreciated on the five-year MACRS schedule. In the terminal phase of growth, investment strategy will likely change to that of a maintenance orientation in support of AI opportunities. As such, an average annual depreciation charge following a straight-line depreciation method is anticipated to be $587,000 reflecting a scaled down one time 3 year investment strategy.

Working capital to support sales is estimated to be 9.65% of yearly sales for the first 5 years and then is projected to slow to a 3.25% annual growth rate thereafter.

The marginal corporate income tax rate is expected to average 29.35% barring any changes to the corporate tax code and the projected annual growth rate of Free Cash Flow (FCF) in the terminal phase is expected to grow approximately 3.95% indefinitely. Historically, the debt-equity ratio has consistently been 140% for which Slocumb’s current debt level is $41.25 Million with an average maturity of 5 years and an interest rate on this debt averaging 8.35%. The equity beta is deemed to be 1.675 while the risk-free rate of return is given as 2.32% and the market risk premium is 8.85%. Currently there are 2,873,000 shares of common stock outstanding.

You have been hired by Slocumb Industries Inc. to determine the following:

1. Operating Cash Flow for each of the first 5 years and the Terminal Phase

2. Free Cash Flow for each of the first 5 years and the Terminal Phase

3. What the Asset Beta (Industry Beta) is that can use in its analysis

4. What the appropriate discount rate is for valuing the firm and hence stock price

5. What the asset value of the firm is

6. What the equity value of the firm is

7. What the appropriate stock price is

Reference no: EM131898671

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