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financial reporting financial statement analysis and valuation

Questions and Answers of Financial Reporting Financial Statement Analysis And Valuation

Companies with characteristics similar to VASM have a WACC of about 14%.
Current revenue is $50 million. EBITDA = 0.15Revenue – 1.5 million such that current EBITDA is 6 million.
Mr. Webster believed that he could make VASM’s revenue grow at 10% per year during the following 3 years.
Prentice Works’ outstanding subordinated notes are priced to yield 9% and the riskless rate is 5%.
Problems 217 as its president with a 3-year contract and competitive compensation, at the end of which he would retire.The following additional information is available:
3. An earnout agreement stipulating a payment to take effect at the end of the 3rd year equal to 0.5 times 3rd-year EBITDA.Prentice Works will assume VASM’s present net debt of $14.8 million.
2. A 7.5% annual coupon 5-year subordinated note issued by Prentice Works for $7 million with principal payable at maturity. In addition, it was decided to elect not to amortize OID (original issue
1. A cash payment for $5 million due at closing.
10.9 VASM is a privately owned manufacturer of light trailers that are sold to rental companies and individuals. Its sole owner, Mr. Benjamin Webster is presently considering a purchase offer from
e. Balkan’s EBITDA is expected to increase at 20% per year during the following 3 years, and its fixed costs are small.At this point, you are adding the final touches to the earnout agreement (item
d. The WACC of companies similar to Balkan is about 13%.
. TUV-TUV’s outstanding debt is priced to yield 9% and its tax rate is 40%.
. TUV-TUV has expressed willingness to pay for Balkan’s equity (items 1 to 3 of the purchase terms) nine times current EBITDA of $4 million minus assumed net debt.
. TUV-TUV would assume Balkan’s net debt of $15 million.
4. Balkan Audio would become a subsidiary of TUV-TUV with Mr. Sobranie staying as its president with a competitive salary for 3 years, at the end of which he would retire.In addition, you have the
. A lump-sum payment at the end of the 3rd year equal to a multiple of 3rd-year EBITDA.This multiple is still subject to negotiation.
. A 10-year $400,000 annuity.
1. A cash payment of $8 million at closing.
10.8 As the investment banker of TUV-TUV Systems, you are working on TUV-TUV’s purchase of Balkan Audio from the sole owner Mr. Yenidge Sobranie. After several meetings with Mr. Sobranie, you have
10.7 You have invested $1 million for a 25% equity stake in a new venture. Current sales are$8.1 million and EBITDA is 10% of sales. You expect to recover your investment plus return in 4 years via
d. What is the implicit post-money valuation of the equity?
c. What price would you pay for each share now?
b. How many new shares need to be issued?
a. What equity participation (percent ownership) would you demand?
10.5 Refer to Problem 10.4 and your answer. In order to check the viability of your investment you want to estimate the number of subscribers required for supporting your valuation.Assume Hotmail
10.4 Assume you are Hotmail’s VC pondering whether to invest $300,000 in the first-stage of the venture. At this point in the negotiation, Mr. Bathia is offering 15% of the equity that, after
10.3 Refer to Section 10.3 and calculate the equity stakes of the entrepreneurs and other employees after the first and the second rounds of financing of Hotmail.
10.2 (a) Consider a 2-year venture requiring $2 million initial investment yielding $5 million(expressed in time-zero present value) with 50% probability or zero with 50% probability.What is its
c. Assume the terms of the deal as calculated in (a) or (b) above but that the entrepreneur assigns probabilities p = 0.25 and 1 − p = 0.75 to the low and high realizations of cash flows,
b. Consider now a financing arrangement that results in non-proportional sharing of cash flows. Let the VC receive a convertible preferred stock that pays a 15% dividend, has a$1,000 liquidation
a. What proportion of the equity would the VC demand in a simple common stock capitalization in order to attain an expected IRR = 40%?
10.1 Consider a start-up requiring $1,000 initial funding. Furthermore, let us assume that the VC estimates the venture would yield the following cash flows with probability p = 0.5 and 1 − p =
Problems 197 Verizon-MCI Merger Synergy Projections 2006–2009 (million $)2006 2007 2008 2009 Expense synergies∗ 500 750 1,000 1,000 Integration costs 600 550 100 —Decrease (increase) in net
9.15 Refer to Example 8 in Section 9.6.3. Here, you are asked to verify Verizon’s estimate of the value of synergies to be attained by its merger with MCI. Verizon estimated that the present value
9.14 Refer to Sections 9.11.2 and 9.11.3, and prepare the stand-alone income statements for CDH Group for the years 2003 to 2007 and compute its EPS. The operating forecasting assumptions for CDH are
9.13 The DCF valuation of Heavy Industries, Inc.’s business plan results in an enterprise value of $100 million. The capital expenditure budget yields negative cash flows during the next 3 years
c. On the other hand, based upon your own research you have concluded that although the real price of oil would stay fairly constant through 1991, oil prices would increase faster than general
b. The original valuation assumed that Gulf’s $39 per share price reflected the market’s assumption that it would maintain its current policy and that no significant changes would take place in
a. The original valuation implied that Chevron could bid up to $85 per share of Gulf.
9.12 Your firm, First Energy Advisors, has been retained to review the valuation of the Gulf Oil Corp. made using the information provided in Problem 9.11. You are in charge of this assignment. You
9.11 On August 11, 1983, T. Boone Pickens and a consortium of investors began purchasing shares of Gulf Oil for $39. On February 22, 1984, Pickens announced a partial tender offer at $65 per share.
f. Assume the government informs Volvo that it is going to vote its shares against the proposed merger at the Procordia shareholders meeting. Design a revised proposal that, in your opinion, can be
e. Assume you are a member of the advisory commission to the Minister of Industry. Would you recommend the approval of the proposed merger?
d. How do you expect the prices of Volvo and Procordia to respond to the merger announcement?
c. Discuss the exchange terms offered to the holders of Volvo convertibles and the value of the warrants embedded in the new convertibles.
b. How would voting power be distributed among the government, Volvo’s shareholders, and others after the merger, with and without changing the government’s A class Procordia shares into B class?
a. It seems reasonable to assume that the merger of an auto and aerospace manufacturer with a food and pharmaceutical company would generate no material operating synergies.Given this assumption,
The capital stock of Procordia was made up of A and B class shares. Each A share carried one vote and each B share carried one-tenth of a vote. There were 253.562 million shares outstanding, of which
9.10 On January 25, 1992, AB Volvo and Procordia AB surprised the business world by announcing that their boards had agreed to a merger. The merger was proposed by Pehr Gyllenhammer, the chairman of
c. Evaluate the transaction from the point of view of Novell’s shareholders.
with the merger would have amounted to $40 million.
b. What increase in the value of the merged company would have justified the transaction from the point of view of Lotus shareholders? Assume that the fees and expenses associated
a. Calculate the 1989 pro-forma EPS of the merged company assuming the proposed exchange took place.
Problems 193 chief executive, and president. The combination was hailed as redrawing the competitive balance in the personal computed software business by providing a challenge to the growing power
9.9 In May 1990 Lotus Development Corp. proposed a merger with Novell, Inc. via a share exchange in which Lotus would exchange 1.19131 of its shares for every Novell share.Under the announced terms,
b. What synergy should the merged firm produce for the shareholders of E-III to break even?
a. Assume no synergy. What are the gains (losses) to each group of shareholders?
9.8 E-III Corp. is investigating the possible acquisition of Reluctant, Inc. The following data are available:E-III Reluctant EPS $2.00 $3.20 Dividend per share 0 $1.60 Number of shares 8,000,000
b. What value should the acquisition create in order to justify the transaction from the point of view of Gould’s stockholders?
a. Estimate the gain and/or loss to Gould and American Micro’s stockholders under the assumption that the acquisition does not create value. Treat American Micro’s preferred as equivalent to
9.7 Consider the acquisition by Gould, Inc. of American Microsystems, Inc. in a stock swap valued at about $200 million. American Microsystems, with sales of $129.4 million, was the largest
d. Assume BONY had accumulated a foothold of 2.8% at an average price of $29 a share prior to its bid and revise your estimate of (c).
c. The increase in the value of the combined entity that has to take place in order to justify the acquisition from the point of view of BONY shareholders.
b. The gains (losses) to each group of shareholders under the assumption that the value of the synergies is $300 million.
a. The 1987 pro-forma EPS of the combined entity assuming that the proposed exchange takes place.
9.6 In the fall of 1987 the Bank of New York (BONY) offered to exchange 1.575 shares of BONY common stock, plus $15 in cash per common share of Irving Bank Corporation.Company data for 1987 were as
b. What are the gains (losses) to each group of shareholders?
a. What is the value of equity of the merged company?
9.5 GLD Corp. is investigating the possible acquisition of Stopper Systems, Inc. The following data are available:GLD Stopper Systems EPS $4.00 $2.20 Dividend per share $1.20 $0.60 Number of shares
9.4 Refer to Section 9.5 and prepare the consolidated balance sheet for the case of negative goodwill. That is, assume the purchase of XYZ was done at $22 a share for a total consideration of $1,100
9.3 Refer to Problem 9.1. Assume the target is a subsidiary of a corporate seller such that the target is able to distribute proceeds tax-free to the parent. Consider the case in which the
9.2 Refer to Problem 9.1. Assume the target has $80 of accumulated NOLs that would expire in 7 years and the tax-exempt interest rate is 3%. Calculate the net proceeds to the seller shareholders and
9.1 Assume the buyer acquires a debt-free target for $70 cash, the target’s tax basis in the assets is $20, the target shareholders’ basis in the stock is $35, and the fair market value of the
8.14 Consider the acquisition of AdvPak Technologies examined in Section 8.9. Let revenue volatility be 20% and assume that you are willing to bid $205 million for the enterprise but that you expect
8.13 Consider an alternative to problem 8.12 that consists of establishing a foothold in the market for a total cost of $18 million, at the maximum rate of $7.5 million per year. It would be possible
8.12 Assume that in problem 8.11 it is possible to exit the business for a net recovery of $20 million if conditions turn out to be worse than expected. Value the entry option and compare it to the
8.11 Refer to problem 8.10. Assume that entry can be postponed but that the initial cost would then be $40 million in real dollars, with the rest of the data as before. What is the NPV of the
c. What is the value created by the investment (NPV) if the initial entry cost is $30 million and no delay or exit options are available?
b. What is the value of the enterprise assuming that it has to be launched right away?
a. What are the expected free cash flows in years 1 through 5?
8.10 Consider entry into a business that, if made at the present point in time, would have a first-year revenue of $5 million. Revenue is expected to grow at a continuous-time real rate of 7% per
8.9 Recalculate the value of the entry option in Example 5 of Section 8.6 for an entry cost of$750 million and compare it to the result of Example 4.
Assume you can buy the option of problem 8.5 for $320. Show how to realize a pure arbitrage profit and interpret your result.
8.7 Refer to the call option of problem 8.5 and assume you can sell it for $400. Show that you can realize a pure arbitrage profit and interpret your result.
8.6 Value the foothold option of problem 8.3 using the option-pricing approach. Use the same traded asset as in problem 8.5.
8.5 Let there be a traded asset with the same risk characteristics as the venture of problem 8.2.Depending on if the venture expected free cash flow is $100 or $200, the traded asset would assume the
8.4 Review Section 8.1.2 and value the deferral option of the first example of Section 8.1.1 using the cash flows the investment opportunity would generate if it were undertaken at time zero. Note
8.3 Consider the case in which learning about expected future cash flows requires an actual investment in the venture but that the investment can be staged. Assume that in the venture described in
8.2 Consider the possibility of waiting 1 year before deciding whether or not to launch the venture described in problem 8.1 at the same initial cost of $1,200. Information about the economy and the
8.1 A new venture can be started at an investment cost of $1,200. The venture would generate a yearly expected real free cash flow of either $200 with probability p = 0.5 or $100, with probability 1
7.6 Ruppert Kasten, a senior loan officer at First Delta Bank, is considering whether his bank should participate in the senior tranche for financing the acquisition of HLT Corp. At this point, he
Nigel Watt is considering the acquisition of the Oak Leather Company. Preliminary analysis of the company has produced the following data:Growth of sales 5.0%EBITDA margin 17.5%Depreciation/sales
7.4 Use the spreadsheet model Debt Capacity Calculator to reproduce Exhibit 7.5.
7.3 Jeffrey Wotsaf, the CFO of the Rapture Corporation, wants to estimate the EBIT interest coverage ratio that would keep the probability of EBIT falling short of interest expense at 0.1% (99.9%
7.2 Reproduce the top panel of Exhibit 7.3 (balance sheet changes) and verify that an EBITDA margin of 17% would permit financing growth at 10% under the financial policy summarized in Exhibit 7.2.
7.1 Refer to the data in Exhibit 7.2. Assume IMT’s target debt ratio is 40% as calculated in Section 7.2 and verify that retained earnings for a growth rate of sales of 7.02% are $44.2.
6.7 Verify the values attained in Example 3 of Section 6.7 for recursive, original, and compressed APV.
6.6 Use the HLF Value Calculator to value the HLF of Exhibit 6.5 using the option pricing model of Equation (6.13) for a volatility of revenue equal to 10%, 15%, 20%, 25%, and 30%. Assume first-year
Use the HLF Value Calculator to compute Equations (6.2) and (6.3), and Equation (6.4)with the data of Exhibit 6.5.
6.4 Use compressed APV to recompute the enterprise value of TPI under the financial policy of Problem 6.3. When would compressed APV be the correct valuation approach?

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