MBA 830 Unit 3 Case Study Appendix A MBA 830 UNIT 3 CASE STUDY The owner of a pr
ID: 2819411 • Letter: M
Question
MBA 830 Unit 3 Case Study Appendix A MBA 830 UNIT 3 CASE STUDY The owner of a private firm has requested that you estimate the value of the firm so that it can be marketed for sale. The firm creates custom, made-to-order furniture. The firm's most rocent resalts are shown in Appendix A Furniture Company Income & FCF Analysis in thousands Management expects revenues, cost of goods sold, operating expenses, depreciation (and amortization), and capital expenditures to grow 20% annually for the next five years with taxes remaining at 40% for each year. Balance sheet items in the most recent year include S10 million of outstanding interest-bearing debt and $10 million book value of equity. The outstanding debe is expected to remain constant for this analysis, and management anticipates no changes in working capital Free cash flows are estimated to grow at 5% after the five year period. Most Recent Yrar s 20,000 of Goods Sold Gross Profit Margin IGrss Prote Mrpn% Industry averages for market value of oquity are three times book value, for beta are 1 30, and for 4,500 market debt ratio are 20%. Average market multiple for the industry is 7 times net income, and the Treasury bond rate is assumed to be 7% 22.5% 2,000 500 Gencral Operating Expenses Based on this information and the information covered in Unit 3, peepare a DCF and Market Multiple analysis (in Excel) to help the owser estimate firm value. Please make sare to include your calculations for the following items on & Amortization 3.00 Annual Free Cash Flows Interest Expenses 1,000 . Cost of debt Cost of equity Income before Taxes WACC . Terminal Value 400 Firm Value, Debt Value, and Equity Value ax Rate Would the owner prefer the DCF or Market Multiple approach to valuation? Why? Net Income S 600 Add: After Tax Interest Expenses Less: Capital Expenditures 600 (1,000) 500 Add: Decrease (Increase) in AR Add: Decrease (Increase) in Inv Add: Increase (Decrease) in AP nlevered Free Cash Flows S 700Explanation / Answer
Market debt ratio = 20%
Cost of Debt (after tax) = 20%* (1- Tax) = 20%* (1- 40%) = 12%
Cost of equity (CAPM) = Risk free return + Beta* ( Market return - risk free return)
Rf = 7% ( treasury bond)
Beta = 1.3
Market return is not given = 20% (assume)
Cost of equity = 7% + 1.3*(20% - 7%) = 23.9%
Total equity Value= $10 milllion
Total debt Value= $10 million
Weightage of equity = 10/ (10 + 10) = 50%
Weightage of debt = 50%
WACC = Cost of equity* weightage of equity + cost of debt * weightage of debt
WACC = 23.9% * .5 + 12%*.5 = 17.95%
Terminal Value = 5th year cash flow / growth rate (5%)
The formula to calculate the present value in excel : PV(rate,nper,pmt,FV)
Firm value = total sum of present value of all future cash flow
= 18946.63
Terminal value = 34836.48
Period 0 1 2 3 4 6 Terminal Revenue 20000 20000*1.2 =24000 28800 34560 41472 49766.4 Cost of goods 15500 15500*1.2= 18600 22320 26784 32140.8 38568.96 Gross profit 4500 5400 6480 7776 9331.2 11197.44 General operating expenses 2000 2000*1.2= 2400 2880 3456 4147.2 4976.64 Depreciation 500 500*1.2= 600 720 864 1036.8 1244.16 Total operating expenses 2500 3000 3600 4320 5184 6220.8 Interest expenses 1000 1000 1000 1000 1000 1000 Income before taxes 1000 1400 1880 2456 3147.2 3976.64 Taxes (40%) 400 560 752 982.4 1258.88 1590.656 Net Income 600 840 1128 1473.6 1888.32 2385.984 after tax interest expense 600 600 600 600 600 600 capital expenditure (1000) (1000)*1.2= (1200) (1440) (1728) (2073.6) (2488.32) changes in working capital 0 0 0 0 0 0 Depreciation 500 600 720 864 1036.8 1244.16 unlevered free cash flow 700 840 1008 1209.6 1451.52 1741.824 1741.824/ .05= 34836.48 WACC 17.95% 17.95% 17.95% 17.95% 17.95% 17.95% present value 712.17 724.54 737.14 749.95 762.98 15259.65Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.