Valuation You are hired by Garcia Incorporated to help with an acquisition value
ID: 2746034 • Letter: V
Question
Valuation
You are hired by Garcia Incorporated to help with an acquisition value of the Weir Guitar Company.Garcia gives you the following financial information related to Weir:
Weir Guitar Company
Balance Sheet
December 31
Actual
estimated
2015
2016
2017
2018
2019
Cash
125,000
489,350
505,000
520,000
561,650
Accounts Receivable
400,000
315,000
425,000
468,550
530,000
Inventory
375,000
225,000
303,450
365,000
420,000
Total Current Assets
900,000
1,029,350
1,233,450
1,353,550
1,511,650
PP&E (net)
2,350,000
2,345,000
2,750,000
2,975,000
3,200,000
Total Assets
3,250,000
3,374,350
3,983,450
4,328,550
4,711,650
Current Liabilities
315,000
284,000
305,000
315,000
338,000
Bonds Payable
800,000
600,000
600,000
400,000
200,000
Deferred Taxes
1,100
2,100
2,200
2,300
2,400
Shareholder Equity
2,133,900
2,588,250
3,076,250
3,611,250
4,171,250
Total Debt and Equity
3,250,000
3,474,350
3,983,450
4,328,550
4,711,650
Weir Guitar Company
Income Statement
for the year ending December 31
Actual
estimated
2015
2016
2017
2018
2019
Sales
3,555,000
3,775,000
3,900,000
4,050,000
4,225,000
Cost of Sales
2,445,000
2,554,000
2,610,000
2,665,000
2,775,000
Gross Margin
1,110,000
1,221,000
1,290,000
1,385,000
1,450,000
Operating Expenses*
445,000
522,000
535,000
553,000
575,000
Income before Taxes
665,000
699,000
755,000
832,000
875,000
Tax Expense**
232,750
244,650
267,000
297,000
315,000
Net Income
432,250
454,350
488,000
535,000
560,000
* Depreciation expense
100,000
105,000
125,000
135,000
140,000
** Deferred income tax
500
1,000
100
100
100
Required (Assuming Garcia has a WACC of 11.0%):
1. Estimate Weir’s free cash flow from 2016 to 2019.
2. Estimate Weir’s value at the end of 2019 assuming it is worth the book value of its assets at the end of 2019.
3. What is the maximum price Garcia should pay for Weir based on your answers to requirements 1 and 2?
4. Estimate Weir’s value at the end of 2019 assuming in the years after 2019 the company’s free cash flow grows 4 percent per year into perpetuity.
5. What is the maximum price Garcia should pay for Weir based on your answers to requirements 1 and 4?
6. How would your valuation change if Garcia is currently not in the Guitar business (i.e. business venture would be unrelated to their current core business operations)?
Weir Guitar Company
Balance Sheet
December 31
Actual
estimated
2015
2016
2017
2018
2019
Cash
125,000
489,350
505,000
520,000
561,650
Accounts Receivable
400,000
315,000
425,000
468,550
530,000
Inventory
375,000
225,000
303,450
365,000
420,000
Total Current Assets
900,000
1,029,350
1,233,450
1,353,550
1,511,650
PP&E (net)
2,350,000
2,345,000
2,750,000
2,975,000
3,200,000
Total Assets
3,250,000
3,374,350
3,983,450
4,328,550
4,711,650
Current Liabilities
315,000
284,000
305,000
315,000
338,000
Bonds Payable
800,000
600,000
600,000
400,000
200,000
Deferred Taxes
1,100
2,100
2,200
2,300
2,400
Shareholder Equity
2,133,900
2,588,250
3,076,250
3,611,250
4,171,250
Total Debt and Equity
3,250,000
3,474,350
3,983,450
4,328,550
4,711,650
Weir Guitar Company
Income Statement
for the year ending December 31
Actual
estimated
2015
2016
2017
2018
2019
Sales
3,555,000
3,775,000
3,900,000
4,050,000
4,225,000
Cost of Sales
2,445,000
2,554,000
2,610,000
2,665,000
2,775,000
Gross Margin
1,110,000
1,221,000
1,290,000
1,385,000
1,450,000
Operating Expenses*
445,000
522,000
535,000
553,000
575,000
Income before Taxes
665,000
699,000
755,000
832,000
875,000
Tax Expense**
232,750
244,650
267,000
297,000
315,000
Net Income
432,250
454,350
488,000
535,000
560,000
* Depreciation expense
100,000
105,000
125,000
135,000
140,000
** Deferred income tax
500
1,000
100
100
100
Required (Assuming Garcia has a WACC of 11.0%):
1. Estimate Weir’s free cash flow from 2016 to 2019.
2. Estimate Weir’s value at the end of 2019 assuming it is worth the book value of its assets at the end of 2019.
3. What is the maximum price Garcia should pay for Weir based on your answers to requirements 1 and 2?
4. Estimate Weir’s value at the end of 2019 assuming in the years after 2019 the company’s free cash flow grows 4 percent per year into perpetuity.
5. What is the maximum price Garcia should pay for Weir based on your answers to requirements 1 and 4?
6. How would your valuation change if Garcia is currently not in the Guitar business (i.e. business venture would be unrelated to their current core business operations)?
Explanation / Answer
Answer 1:
Answer 2:
Weir’s value at the end of 2019 will be equal to Shareholder Equity of $ 4,171,250 if we consider book value for the purpose of valuation.
Answer 3:
Maximum price Garcia should pay for Weir in requirement 1 is $ 1,953,574 and requirement 2 is $ 4,171,250.
Answer 4:
For solving this, we need to calculate value of perpetuity at the end of 2019.
Value at the end of 2019 = Cash flow at the end of 2020 / WACC - Growth rate
= 700,100 * 1.04 / 11.00% - 4.00%
= 728,104 / 7.00%
= 10,401,486
.Answer 5:
Maximum price Garcia should pay for Weir in requirement 1 is $ 1,953,574 and requirement 4 is $ 8,805,355.
Answer 6:
If Garcia is currently not in the Guitar business, then valuation should be based upon fair value of the assets acquired during acquisition.
2016 2017 2018 2019 Net Income 454,350 488,000 535,000 560,000 Depreciation expense 105,000 125,000 135,000 140,000 Deferred income tax 1,000 100 100 100 Free Cash flow = Net income + Depreciation + Deferred tax 560,350 613,100 670,100 700,100Related Questions
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