ABC Companys financial statements given below. This company belongs to the retail sector and the current market price is $20 per shares with 50,000 common shares outstanding. All net income is re-invested back into the company. Assume the Companys beta on YEAR 0 is estimated to be 1.75, due to lack of historical data. For the foreseeable future risk-free rate is 2.5%, and market risk premium is 11%. Furthermore, assume the company has a long-term growth rate in comprehensive income and FCF for 2.5% after the fifth year. Net income and comprehensive income will be identical. Expect debt to equity ratio and WACC to be the same after year 5 and beyond. What is the company's value using the following methods?
1a) Free Cash Flow (FCFF and FCFE) Assume no change in cash liquidity
1b) Valuation Ratios (Market Multiples), use at least three ratios
1c) Analyze and explain which one of the above valuation methods provides a better and more realistic valuation based on the solutions and data in this case
Income Statements Year 2 Year 1 Year 3 Year 4 Year 5 Revenues $2,173,600 $2,282,280 $2,396,394 $2,516,214 $2,667,024 Cost of Sales 1,395,708 1,490,980 1,578,910 1,685,954 1,814,508 Gross Profit $777,892 $791,300 $817,484 $830,259 $852,516 Accounting $6,240 $6,552 $6,880 $7,224 $7,585 Advertising & Promotion $47,759 $42,640 $40,363 $37,778 $34,853 Bank Charges $43,156 $45,314 $47,579 $49,958 $52,457 Compensation & Benefits $256,509 $264,204 $272,130 $280,294 $288,702 Consulting Fees $2,496 $0 $0 $0 $0 Insurance $1,092 $1,040 $1,147 $1,204 $1,265 Lease - Facilities $349,440 $349,440 $349,440 $349,440 $349,440 Legal & Professional 500 500 500 500 500 Licenses & Fees 500 510 520 531 541 Maintenance 637 600 612 624 649 Miscellaneous 1,800 1,836 1,873 1,910 1,948 Office supplies 2,700 2,754 2,809 2,865 2,923 Security 720 742 764 787 810 Telephone 1,836 1,800 1,873 1,910 1,948 Utilities 4,410 4,862 4,200 4,631 5,105 Website 1,800 1,800 1,800 1,800 1,800 Total Operating Exp. 721,260 724,242 732,932 750,525 741,700 EBIDTA $56,633 $67,058 $84,552 $88,560 $101,991 Depreciation 4,916 4,916 4,916 4,916 4,916 Operating Profit $51,717 $62,142 $79,636 $83,644 $97,075 Interest Expense 10488 8832 11040 9936 9384 Earnings Before Taxes 40,677 51,654 69,700 74,260 88,243 Income Taxes 8,542 10,847 14,637 15,595 18,531 Net Income $40,807 $32,135 $55,063 $58,665 $69,712 Balance Sheets Year 5 Year 1 Begin Year 2 Year 3 Year 4 Cash 239,914 80,307 122,461 166,233 $33,150 77,000 $50,685 Inventory 191,916 213,416 237,641 264,950 278,197 Total Current Assets $431,183 $518,111 $110,150 $242,601 $293,723 $360,102 Fixed Assets 33,850 33,850 33,850 33,850 33,850 33,850 Less: Depreciation 4,916 9,832 19,664 24,580 14,748 Net Fixed Assets 24,018 33,850 28,934 19,102 14,186 9,270 Total Assets 271,535 317,741 144,000 379,204 445,369 527,381 Accounts Payable 100,000 110,000 121,000 133,100 150,000 Long Term Debt 92,000 87,400 82,800 78,200 73,600 69,000 Total Liabilities 92,000 187,400 192,800 199,200 206,700 219,000 Owner's Equity Paid in Capital 52,000 52,000 52,000 52,000 52,000 52,000 Retained Earnings 32,135 72,941 128,004 186,669 256,381 Total Liabilities & $271,535 $317,741 $379,204 $445,369 $527,381 Equity $144,000 Income Statements Year 2 Year 1 Year 3 Year 4 Year 5 Revenues $2,173,600 $2,282,280 $2,396,394 $2,516,214 $2,667,024 Cost of Sales 1,395,708 1,490,980 1,578,910 1,685,954 1,814,508 Gross Profit $777,892 $791,300 $817,484 $830,259 $852,516 Accounting $6,240 $6,552 $6,880 $7,224 $7,585 Advertising & Promotion $47,759 $42,640 $40,363 $37,778 $34,853 Bank Charges $43,156 $45,314 $47,579 $49,958 $52,457 Compensation & Benefits $256,509 $264,204 $272,130 $280,294 $288,702 Consulting Fees $2,496 $0 $0 $0 $0 Insurance $1,092 $1,040 $1,147 $1,204 $1,265 Lease - Facilities $349,440 $349,440 $349,440 $349,440 $349,440 Legal & Professional 500 500 500 500 500 Licenses & Fees 500 510 520 531 541 Maintenance 637 600 612 624 649 Miscellaneous 1,800 1,836 1,873 1,910 1,948 Office supplies 2,700 2,754 2,809 2,865 2,923 Security 720 742 764 787 810 Telephone 1,836 1,800 1,873 1,910 1,948 Utilities 4,410 4,862 4,200 4,631 5,105 Website 1,800 1,800 1,800 1,800 1,800 Total Operating Exp. 721,260 724,242 732,932 750,525 741,700 EBIDTA $56,633 $67,058 $84,552 $88,560 $101,991 Depreciation 4,916 4,916 4,916 4,916 4,916 Operating Profit $51,717 $62,142 $79,636 $83,644 $97,075 Interest Expense 10488 8832 11040 9936 9384 Earnings Before Taxes 40,677 51,654 69,700 74,260 88,243 Income Taxes 8,542 10,847 14,637 15,595 18,531 Net Income $40,807 $32,135 $55,063 $58,665 $69,712 Balance Sheets Year 5 Year 1 Begin Year 2 Year 3 Year 4 Cash 239,914 80,307 122,461 166,233 $33,150 77,000 $50,685 Inventory 191,916 213,416 237,641 264,950 278,197 Total Current Assets $431,183 $518,111 $110,150 $242,601 $293,723 $360,102 Fixed Assets 33,850 33,850 33,850 33,850 33,850 33,850 Less: Depreciation 4,916 9,832 19,664 24,580 14,748 Net Fixed Assets 24,018 33,850 28,934 19,102 14,186 9,270 Total Assets 271,535 317,741 144,000 379,204 445,369 527,381 Accounts Payable 100,000 110,000 121,000 133,100 150,000 Long Term Debt 92,000 87,400 82,800 78,200 73,600 69,000 Total Liabilities 92,000 187,400 192,800 199,200 206,700 219,000 Owner's Equity Paid in Capital 52,000 52,000 52,000 52,000 52,000 52,000 Retained Earnings 32,135 72,941 128,004 186,669 256,381 Total Liabilities & $271,535 $317,741 $379,204 $445,369 $527,381 Equity $144,000
