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financial reporting financial statement analysis and valuation

Questions and Answers of Financial Reporting Financial Statement Analysis And Valuation

10. Scroll down and you will find a complete set of pro-forma projections for income, balance sheet, and cash flow statements. You only need to enter the interest earned
9. Scroll down to Balance Sheet Adjustments at Closing and enter the June 30, 2000 balance sheet data from Exhibit A from Problem 13.4 on the Cap & Seal column.A number of adjustments, such as the
8. Scroll down to Cap & Seal—Working Capital Assumptions and enter projections for minimum cash balance, other current assets, accruals, and tax payable.
7. Enter the projection for tax patent amortization.
6. Return to Historical Data. . . on the Financials sheet, and write book patent amortization on the line immediately below book depreciation.
5. Book and tax depreciation projection: Choose Depreciation Schedules in the Historical Data and Forecasting Assumptions module. Go to the Depreciation Schedules sheet and enter the data through
be determined. In the present case the sponsor will pay $17.915, the same price as that used to value management’s rollover. Determine how many shares the sponsor needs to buy in order to close the
d. Do not use the revolver if at all possible. Its purpose is not to fund the transaction.
c. The amount of subordinated debt. Here, it will be original issue discount (OID) debt.You will need to specify the particulars of OID. Don’t worry about the equity kicker;you will deal with it
b. A tentative amount for the senior debt (this amount may need to be adjusted later on to make sure you meet the lenders’ amortization requirements, if any).
a. How much of the available cash you plan to use to fund the transaction.
in the addition of the
4. In addition, visual inspection would reveal inconsistencies and errors. Go to the Transaction Summary sheet and check schedules for consistency. Any discrepancy or outlier indicates that the
3. Checks for equality between enterprise and continuation values in WACC and EVA valuations are shown in the EVA section of the WACC Valuation sheet.
2. The excess cash line on top of the Debt & Taxes sheet should be non-negative.
1. On top of the Financials sheet there are three checks: balance sheet equality, cash balance non-negativity, and sources equal uses equality.
14.8. The value of the equity per share is (¤1,370.7 + ¤10.7)/809 = ¤1.7075, the exercise price is ¤6.098. The value of three warrants is ¤0.328 or ¤0.328 × 96.667 million = ¤31.7 million in
(b) Senior bond-holders are likely to demand faster amortization of principal if they are going to accept a below-market coupon. Subordinated bond-holders will also attempt to obtain better terms and
14.5. (a) The following exhibit shows that the proposed recapitalization is feasible.SM Holdings Revised Projected Cash Flows Year 0 1 2 3 4 5 EBIT (g = 5.0%) 300 160 168 176 185 194 Interest expense
13.9. The minimum rate is 11.28%. Verify that 11.28% coupon interest plus the warrants yields 14% to Provident.CHAPTER 14
13.7. (a) Cost of warrant kicker = 2.63 × 1 million = $2.63 million.(b) The all-in cost (AIC) of the debt plus warrant package is 13.9% versus the AIC of the straight debt issue that is 13.1%.
13.5 Warrant value = $7.73 and 40.62 warrants need to be attached to each bond.
13.4. See DealModeler???? LBO Demo in enclosed CD-ROM.
10.14. The earnout equals (2.5)(0.15) = 0.375 times the difference between (a) three yearly calls on revenue, each based upon the present value of the respective expected revenue and an exercise
10.12. Value of the earnout = $1.514 million. The earnout multiple needs to be increased to 9.785x.
10.10. The earnout is worth $2.863 million. But this earnout pays only when EBITDA exceeds the threshold of $6 million.
(c) Value of offer for enterprise = $29.251 million.
(b) Value of earnout = $ 2.721 million.
10.9. (a) Subordinated note worth = $6.730 million.
(d) Post-money valuation = $5.08 million
(c) Price per share = $6.152.
(b) New shares = 325,100 shares.
10.6. (a) VC required ownership = 39.4%.
10.3. 84.25% and 75.38%, respectively.
(b) NPV = $1 million and the VC would demand 60%.
10.2. (a) NPV = $0.5 million and the VC would demand 80% of the equity.
9.14. See DealModeler???? M&A Demo in enclosed CD-ROM.CHAPTER 10
9.12. Maximum bid = $67/share.
9.11. Real WACC = 7.58%. Maximum bid = $84.6/share.
9.7. (a) Gould’s gain = −$63.4 million. AM’s gain = $63.4 million.(b) Required synergy = $77.0 million.
9.5. (a) VG+S = [(1.2)(6) + (0.6)(2)](1 + g)/(k − g) = $88.2 million for g = 5% and k = 15%.(b) Exchange ratio = 0.6/1 or 2 × 0.6 = 1.2 m shares issued.P = Price paid for SS = [1.2/(6 + 1.2)]VG+S
9.1. In a stock purchase the proceeds to the seller would be $63. In an asset purchase the proceeds to the seller would be $47 and the buyer would be able to step up the basis of Appendix C Answers
8.14. The Real Options Calculator I gives $275.1 million as the value of the acquisition, with exit when revenue falls below $42 million.CHAPTER 9
8.11. The Real Option Calculator I gives $16.23 million as the value of the entry option, with entry threshold at $16.67 million of revenues.
(b) Enterprise value = $18.27 million. NPV = −$11.73 million.
8.5 and its price: $400 − $363.64 = $36.36. This means that no rational investor would price the option above its arbitrage-free value of $363.64.8.10. (a) The expected free cash flows in years 1
8.7. Consider the transaction: {buy 800 units of the traded asset, sell the option to invest, borrow(or short bills) at 10%} This results in the following payoffs:Year 1 Now FCF = $100 FCF = $200 Buy
8.5. c = $363.64.
8.2. NPV = $363.64.
8.1. NPV = $300.
. Substituting the data into the Debt Capacity Calculator yields a debt capacity of 4.28×EBITDA or 4.37 × $3.085 million = $13.5 million. This means that Watt needs to raise$2.5 million of
7.3. For Wotsaf’s estimates: g = 30%, σ = (65% + 5%)/6 = 11.67% the EBIT coverage ratio is[1 − 3.09 σ/(1 + g)]−1 = 1.4×, for a 0.1% probability of shortfall. (Note that for normally
7.1. The capital required to finance 7.02% growth is $73.7 million. A target debt ratio of 40%requires an increase in debt of 40% of $73.7 or $29.50. Furthermore, a net income margin 366 Appendix C
6.6. Entering the data from Exhibit 6.5 into the HLF Value Calculator yields the following values:Volatility Revenue Option V0 S0 10% 22% $1,948 $448 15% 30% 1,997 497 20% 39% 2,052 552 25% 48% 2,109
6.5. V0 = $1906.2.
6.2.PV of FCF at unlevered cost of equity = 15.20% $44.78 million PV of 2009 continuation value at WACC = 14.42% 175.13 PV of tax shield at cost of debt = 8% 8.90 Enterprise value 228.81 Net debt
Enterprise value/Invested capital 3.25 2.34 Enterprise value at exit in 6 months (millions) $6,500 $2,340 Minus net debt 2,275 702 Net proceeds at exit $4,225 $1,638 Present value of net proceeds @
5.8. Great Dane Capital can pay a maximum price of $4.9 billion for the equity of North American Labels or $49 a share. The sum-of-the-parts valuation follows:Pinkerton Pipedream Invested capital
5.5. Enterprise value = $268 million. During the first 10 years NOPAT and capital will grow at% and ROC = 25%, so capital invested would equal 15%/25% or 60% of NOPAT.
. PV of EVA $27.10 million PV of continuation value 131.17 Total PV of EVA 228.27 Beginning capital 70.00 Enterprise value 233.38 Appendix C Answers to Selected End-of-Chapter Problems 365
4.6. Price per share = 128 pence or $15.6 per ADR.CHAPTER 5
4.4. P/E = No-growth term + Franchise factor × Growth factor = 8.33 + (4.76)(1.40) = 15×.
4.3. (a) (b) (b) (c)Debt ratio 30% 20% 40% 35%P/E 18.00 17.10 21.00 8.93 EBITDAx 6.53 6.25 6.85 3.92 EBITx 10.89 10.42 11.41 6.53 RevenueX 0.65 0.63 0.68 0.39
4.1. (a) Value of equity = 61.05. Initial P/E = 12.2 (forward). Continuation value P/E = 10.9(trailing).(b) g = 9.7%, forward continuation value P/E = 9.9.
3.3. Required return on the S&P 500 index: k = 9% + (4%)(1) = 13.0%.(a) P/E0 = Payout (1 + g)/(k − g) or k − g = yield (1 + g), where yield = Payout/(P/E0) = 2.9%g = (k − y)/(1 + y) = (13% −
2.11. EPS2013 = (0.99)(1.185)5(1.09)5 = $3.6 Dividend2014 = (0.51)(3.6)(1.04) = $1.9 Share value2013 = 1.9/(0.10 − 0.04) = $31.7 Share value2002 = $31.7/(1.12)10 = $10.2.363 364 Appendix C Answers
(c) 2008 2012 P/E 22.3 9.9
2.8. (b) Enterprise value $1,198.4 million 650.0 Equity 548.4 Shares 35 Value per share $15.67
2.5. Cost of equity = 4.5% + (0.66)(4.4%) + 3.9% = 11.3%.PV of FCF $62.20 million 2012 continuation value at 3% growth rate $321.70 PV of continuation value 188.32 Enterprise value on 1/1/2008 $250.52
2.4. (a) Applying the comparable EBITDA multiple to Fleet’s 2004 EBITDA yields: 56.7 × 6 =$340 million.(b) Cost of debt = 7%, cost of equity = 4.5% + (1.32)(4.4%) + 3.9% = 14.4%, WACC= 9.27%.PV of
2.1. After-tax cash flow = $135, 000.
9. An alternative: Rather than introducing a knockout barrier, you can still attain three degrees of freedom by simply reducing the depth of the floor (i.e., by providing a price guarantee for only a
8. Attach a knockout barrier at some percentage above the current common stock price such that the put disappears if the price reaches the barrier. Now you have introduced an additional degree of
7. Attaching a floor increases the value of the Percs designed in Step 1 above the common stock price (why?). So, in order to decrease its value to the common stock price, you have to reduce the
6. Choose a floor and value it. Note that the floor is a European option. You have all the information necessary to value it.
in designing the traditional Percs you have only one degree of freedom.Step 2: Make the Percs puttable
4. Now you can solve for the cap X necessary to offset the higher Percs dividend. The cap is a European call for which all the data except X are already available including the value of the cap.
3. Since you want to price the Percs at the common stock price, the increase in value of the Percs produced by the difference in the present value of (1) and (2) has to be offset by the Percs cap.
2. Value the common dividend foregone. In practice you will want to check the consensus EPS growth forecast and payout in order to forecast dividend growth. In June 1994 IBM was expected to keep its
1. Choose a preferred dividend as of July 1, 1994, say 6% of the stock price and obtain its present value. Dividend dates are Sept. 10, Dec. 10, March 10, and June 10.
e. Summarize the shareholder value expected from BAT’s plan based upon your recommendations and estimates in (c) and (d). Rely on the low end of the analysts’ consensus as needed. Take into
d. Consider the proposal for the sale of BAT’s retail business based upon the lowest value of the analysts’ consensus (except Argos, the UK catalog retailer, which analysts priced at 12× P/E).
c. BAT decided that the appropriate response to Goldsmith was to abandon its diversification strategy and to focus on tobacco and financial services. Accordingly, it considered selling the U.S.
b. Examine Hoylake’s proposal from the point of view of BAT shareholders. What value would they expect to realize as per Hoylake’s offer?
a. Hoylake’s expenses were expected to be 1.5% of the total value of the acquisition and 3% of subsequent breakup proceeds. What return would the Hoylake group expect to realize assuming it would
On July 11, 1989, Sir James Goldsmith’s bidding vehicle Hoylake Investments Ltd.launched an offer of 850 pence per share for BAT Industries, the UK-based tobacco conglomerate.39 The initial bid was
c. What other actions were available to Racal?
b. How feasible was his de-merger and buyout plan?
a. What do you make of the valuations of Racal’s units given above? How do you explain them? What do you think was Sir Ernest’s motivation?
Racal Electronics had 1.3 billion shares outstanding, which traded at 190 pence.Racal Telecom had 1 billion shares outstanding (including the 80% owned by Racal Electronics)and traded at 275 p.
(2) Racal Chubb Security, the security business, and (3) the “rump” of Racal Electronics, the main business of which was defense electronics, data communications, and networks.Sir Ernest planned
15.4 On November 15, 1990, the Chairman and CEO of Racal Electronics, Sir Ernest Harrison announced a de-merger (breakup) plan for two of its three main business units. Sir Ernest’s purpose was not
15.3 Value the “harvest” action toward WTT’s metal products division by discounting free cash flows.
15.2 Refer to Section 15.6 and value the “stop volume growth” action for the metal products division of WTT by discounting free cash flows. (Hint: You should get the same result as that obtained
15.1 Review Equations (5.1) and (5.2) of Chapter 5 and verify the calculation of continuation value added made for each unit in Exhibit 15.2.
7. Repurchase Wendy’s shares using the proceeds from refranchising, sale of ancillary brands, and monetization of real estate.
6. Monetize real-estate holdings by selling approximately 200 real-estate sites in Wendy’s franchisees’ stores.
5. Close 40 to 45 non-performing stores.
4. Refranchise a significant portion of Wendy’s-operated restaurants.
3. Reduce costs at Wendy’s stand-alone stores by $200 million.

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