You are valuing DistressCo, a company struggling to hold market share. The compa

Question

You are valuing DistressCo, a company struggling to hold market share. The company currently generates $120 million in revenue, but its revenue is expected to shrink to $100 million next year. Cost of sales currently equals $90 million and depreciation equals $18 million. Working capital equals $36 million and equipment equals $120 million. Using this data, construct operating prot and invested capital for the current year. You decide to build an as-is valuation of DistressCo. To do this, you forecast each ratio (such as cost of sales to revenues) at its current level.

(a) Based on this forecast method, what are operating prots and invested capital expected to be next year?

(b) What are two critical operating assumptions (identify one for prots, and one for capital) embedded in this forecast method?

(c) Assume NOPLAT is expected to grow at 6%, ROIC equals 16%, and the weighted cost of capital is 10%. Using the key driver formula in chapter 2, what is the enterprise value for the company?

Explanation / Answer

Ans;

Revenue = 120 mn

revenue shrink = 100 mn

COGS = 90 mn

Depreciation = 18 mn

WC = 26 mn

PPE = 120 mn

Operating profit for current year =120-90-18 = 12 mn

this yr operating profit = 10% of revenue

next yr operating profit = 10% of revenue = 10 mn

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