2017 Income Statement and Balance Sheet Data for Young LLC.

Year	2017
Balance Sheet ($ 000)
Assets
1 Cash and Equivalents	11,000
2 Accounts Receivable	4,000
3 Inventories	5,000
4 Total Current Assets	20,000
5 Property, Plant, and Equipment	10,000
6 Goodwill	---
7 Total Assets	30,000
Liabilities and Stockholder's Equity
8 Accounts Payable	1,255
9 Debt	6,000
10 Total Liabilities	7,255
11 Stockholder's Equity	22,745
12 Total Liabilities and Equity	30,000

Year 2017

Income Statement ($ 000)

1 Sales 20,000

2 Cost of Goods Sold

3 Raw Materials (3,000)

4 Direct Labor Costs (2,400)

Gross Profit 14,600

Sales and Marketing (2,600)

7 Administrative (3,800)

8 EBITDA 8,200

9 Depreciation (1,000)

10 EBIT 7,200

11 Interest Expense (net) (300)

12 Pre-tax Income 6,900

13 Income Tax (2,415)

14 Net Income 4,485

In this question, you are hired by Pereira & Entrup Partners (PE) to decide whether it is worthwhile to purchase a private firm, Young LLC. Young LLC produces a type of communicating watch with its own apps. The following table shows the financial information for Young LLC.

Young LLC has excess cash of $10 million. Based on its business, the comparable companies are Microsoft Corporation (MSFT), Alphabet Inc. (GOOGL), and Apple Inc. (AAPL), which have financial data on finance.yahoo.com and Bloomberg terminals in the Trading Room. The owner of Young is willing to accept a price based on the average of equity prices estimated using P/E, Enterprise Value/Sales, and Enterprise Value/EBITDA ratios for each of the comparable firm. Based on your analysis, what acquisition price will you propose to pay for the owner (the equity holder)? (If you are not able to estimate those valuation ratios for comparable firms, you can use the ratios in the following table.)

Valuation ratios of comparable firms
Multiple AAPL MSFT GOOGL
P/E 18.0 28.0 35.0
EV/Sales	4.0 6.4 6.0
EV/EBITDA	12.8 18.4 18.3

Your manager wants to know how much money can PE make after buying the firm. You are given the following assumptions (if you need any other assumptions, please list them explicitly in your answer):

1.Market size for this type of watch is 1 million units in current year and is expected to grow at the rate of 10% per year in the coming five years;

2.Market share of Young is 20%. With some sales and marketing strategies, the market share can be increased by 200 basis points per year for the coming 5 years. That is, the market share next year will be 22%.

3.The average sales price is $100/unit in current year and is expected to grow at the rate of 3% per year.

4.The raw materials cost $15/unit in current year and is expected to grow at the rate of 4% in the coming 5 years.

5.The direct labor costs are $12/unit in current year and is expected to grow by 5% per year in the coming 5 years.

6.The sales and marketing costs account for 13% of the sales in current year. To increase the sales, PE plans to increase these costs to 16% in the next year and 18% in the year after next. After that, the costs will be 20% of the sales every year.

7.The administrative costs are 19% of sales in current year. PE plans to decrease them to 16% of sales in the next year, and 15% of sales from the year after next on.

8.The tax rate is 35% for current year. It is expected to decrease by 5 percentage points in the next year. The tax rate is expected to be 20% from the year after next on.

9.The depreciation expense equals 10% of Property, Plant and Equipment of that year.

10.The Capital expenditure equals the depreciation cost.

11.Your manager wants you to use the discounted cash flow approach to estimate the continuation value.

12.To get the unlevered cost of equity, you are expected to estimate the levered beta of comparable firms using the stock return data of most recent 60 calendar months, calculate the unlevered beta assuming their debts are risk free, and take an average of the unlevered beta. (If you are not able to get the unlevered cost of equity, you can use 8% to continue the rest of the question. In this case, you will lose the partial points on the unlevered cost of equity estimation.)

To improve the operational efficiency, PE hopes to reach the following goals from the next year on: the accounts receivable will be 45 days of sales revenue, the raw materials will have 20 days of inventory, the finished goods will have 30 days of inventory; the minimum cash balance will be 20 days of sales. The wage payable will be 15 days of labor costs (including both the direct labor cost and administrative costs) and other account payable will be 60 days of raw materials and sales & marketing costs.

To increase the firm value, if the interest expense in current year is less than 30% of EBIT in the previous year, PE believes that the debt level is safe. In other words, PE wants to increase the debt level so that the interest expense for current year equals 30% of the EBIT of previous year for the coming 5 years. The interest rate for the safe debt is 5% per year. After five years, the acquired firm is expected to be sold at a price valued based on the perpetual free cash flows growing at 2% per year rate forever.

Based on these assumptions, what is the NPV of acquiring Young LLC.?