Reference no: EM131155984

Your private equity company, Blackstone, is considering the acquisition of Chewco. In the following pages, you will consider some of the available information for Chewco to determine an appropriate valuation to be used in your purchase decision.

The next page of the exam has information about the financial statements for Chewco and some data for comparable companies.

(Provide enough information that we can understand how you calculated your answers.)

2015 Income Statement and Balance Sheet Data for Chewco Corporation

Income Statement ($ 000)	Year 2015
Sales	150000
Cost of goods sold
Raw materials	-32000
Direct labor costs	-36000
Gross profit	82000
Sales and marketing	-22500
Administrative	-27000
EBITDA	32500
Depreciation	-11000
EBIT	21500
Interest expense (net)	-150
Pretax income	21350
Income tax (tax rate 35%)	-7472.5
Net income	13877.5

Balance Sheet ($ 000)	Year 2015
Assets
Cash and equivalents	25328
Accounts receivable	36986
Inventories	12330
Total current assets	74644
Property, plant and equipment	99000
Goodwill	0
Total assets	173644
Liabilities and Stockholder's Equity
Accounts payable	9308
Debt	9000
Total liabilities	18308
Stockholder's equity	155336
Total Liabilities and equity	173644

Ratio	Oldco	Middleco	Ancientco
P/E	19.2	15.1	27.3
P / Sales	1.7	1.3	2.6
P / EBITDA	11.6	9.1	14.7

2(a). What range for the market value of equity for Chewco is implied by the range of P/E multiples for the comparable firms of Oldco, Middleco and Ancientco.

•The low price implied by the comparable P/E ratios is .

•The high price implied by the comparable P/E ratios is .

2(b). Using the average Price /Sales ratio of the comparable firms, estimate Chewco's value of equity.

•The average P/Sales ratio is .

•The estimated equity value for Chewco based on that average ratio is .

2(c). How would your analysis differ if you were computing equity value based on EV / EBITDA?

2(d). Briefly summarize the strengths and weaknesses of valuation with ratio analysis.

2(e). It is January 1 2016. Blackstone believes that it can improve the performance of Chewco. It has estimated that under its management, the year-end free cash flows will be as follows:

In year 2016, FCF = 16935
In year 2017, FCF = 20525
In year 2018, FCF = 24335

From then on, Blackstone estimates that FCF will grow at a perpetual rate of 4%.

Blackstone believes that the cost of capital for projects of similar risk is 13.1% and will finance the project with all equity. The tax rate is 35%.

Use discounted cash flow methodology to determine the value of Chewco as of January 1 2016:

•What is the present value of the year-end cash flows in years 2016, 2017 and 2018.

•What is the terminal value?

•What is the present value of the terminal value?

•What is the overall value of the company using DCF analysis?

•How does this valuation compare to your valuation based on ratio analysis?