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$75,000 DMC Co. Balance Sheet Total Liabilities & Equity - Using a free cash flo

ID: 2769713 • Letter: #

Question

$75,000

DMC Co. Balance Sheet

Total Liabilities & Equity


- Using a free cash flow multiple of 3, what is the value of DMC?

- What is the tangible asset value of DMC, excluding cash?

- You expect cash flow to grow 5% per year for the first five years and then grow at an annual rate of 3% thereafter. You require a return of 35% on an investment of this type. Using the discounted cash flow method, what is the value of DMC Company?

DMC Co. Income Statement Sales $4,321,432 Cost of goods sold $3,213,213 Gross profit $1,108,219 Operating expenses Depreciation $51,013 Selling, general and admin. $543,210 Operating income $513,996 Interest Expense $65,653 Net Income Before Taxes $448,343 Income Tax $123,456 Net income after taxes $324,887 Annual Capital Expenditure

$75,000

Explanation / Answer

1)TaxRate=tr=Income Tax/Net Income Before Taxes=123,456/448,343=0.27536=27.536%

Free cash flow to firm=FCF=after tax Operating income+Depreciation - Annual Capital Expenditure

FCF= Operating income*(1-tr)+Depreciation - Annual Capital Expenditure

FCF= 513,996*(1-0.27536)+51,013- 75,000

FCF= 372462.06144+51,013- 75,000

FCF=348475.06144

Value of DMC=free cash flow multiple of 3*FCF

Value of DMC= 3*348475.06144

Value of DMC=1045,425.18432

2)the tangible asset value of DMC, excluding cash

=Market Values of Land+Buildings+Equipment+ Inventory + Accounts Receivable

=150,000 + 650,000 + 65,000 + 41,000 + 98,000

=1004,000

3)

growth for first 5 yrs 5.00% (=g) growth after 5 yrs 3.00% (=gL) rate of return 35.00% (=r) PV CF Year(t) FCF(FCFt) HorizonValue(TV) CF=FCFt+TV (=CF/(1+r)^t 0 348475.0614 1 365898.815 365898.815 271036.1589 2 384193.755 384193.755 210805.9014 3 403403.443 403403.443 163960.1455 4 423573.615 423573.615 127524.5576 5 444752.296 1431546.4525 1876298.748 418439.9547 6 458094.865 value of DMC Company $                      11,91,766.718 (HorizonValue=FCF in year 6/(r-gL) (=sum of above PVs) FCF in yr 6=FCF in yr 5*(1+gL),FCF in yr t=FCF in yr (t-1)*(1+g) for first 5 years