Barringer, Inc.

Barringer, Inc. is a newly created firm that came into existence through an equity spin-off from 3^rd Ave. Partners-a private equity firm specializing in organizational restructurings and recapitalizations. Barringer specializes in the development of new virtual/augmented reality applications for video game platforms. Currently the firm is based out of Foxboro, Massachusetts but is contemplating a move to Jacksonville, Florida to take advantage of a more favorable tax and regulatory climate.

Currently, Barringer has hired a technology related consulting firm Alexion Associates, Inc. to develop future sales projections for the company. The strategy being to shorten turnaround time for new product development and renew product lines more quickly to gain a competitive advantage and hence increase market share in the future. This will also assist in corporate planning and the implementation of new strategic investments. After diligent research, Alexion Associates established pro forma projections for Barringers only product-Zoriac. The companys original plan was to focus on a single line to build specialization and economize on overall cost structures. Due to industry growth and hence Barringers growth, the firm in currently contemplating the development of a more diversified product line which will reduce the overall business risk to the firm should the market turn from the companys current applications. After considerable research and work, Zoriacs pro-forma unit-sales projections are as follows for the ensuing five years:

Year 1 279,329 units

Year 2 335,535 units

Year 3 301,437 units

Year 4 247,695 units

Year 5 165,485 units

Such estimates established by Alexion Associates are based on the premise that the current average selling price (ASP) of $827 per unit holds for the first two years and a subsequent reduction to $495 per unit prevails in years three through five. Because of expected competitive pressures, it is assumed that unit sales will decline by an average of 6.75% per year starting in the terminal time period lasting indefinitely thereafter and the ASP to decline by 5.25% per year starting in the terminal period with the trend expected to continue indefinitely thereafter as well.

An internal corporate analysis has determined through various cost accounting and engineering studies that Barringer is able to produce its Zoriac product at a variable cost approximating $51.25/unit. Due to a tight labor market and resource constraints nationwide, the VC cost/unit is expected to rise by 4.25% per year for the first 5 years and increase by an average of 3.75% per year starting in the terminal time period with an indefinitely continuing trend thereafter. Due to growing capacity needs, Barringers total annual fixed costs are projected to start at $19,375,000 annually and grow by an estimated 6.50% per year indefinitely into the future.

To maintain its competitive advantage well into the future, necessary capital expenditures for the firm are projected to be an initial $28,337,000 up front for which an IRS ruling requested by the company places such an investment in the five-year MACRS depreciation schedule. The market is expected to dynamically change going forward, but neither Barringer nor Alexion Associates can reasonably predict such changes in technology and their inherent future financial impact. As such, both parties agreed to conservative defensive estimates of required future investments. With reverse cost engineering, depreciation is estimated to be $1.15 Million per year on a straight-line basis in the terminal phase of growth covering an additional 5-year investment. Such an investment is designed to result in a strategic operational change in Barringer to annuitize service-related revenue from video game platform services.

To support the operational capabilities of Barringer, a working capital investment coming to approximately 10.67% of annual sales is projected for the first 5 years. In the terminal period, such working capital investments are expected to decline to an average 2.95% of sales.

The marginal corporate income tax rate is expected to average 21% reflecting recent changes to the marginal corporate income tax rate. Free Cash Flow (FCF) in the terminal phase of the project is expected to grow approximately 6.15% indefinitely. From an historical perspective, the debt-equity ratio has averaged 1.06 for which Barringers current debt level is $489,000,000. The average maturity of the debt is 5 years with an expected consistent 5-year rollover indefinitely into the future. Based on an S&P credit rating of C+, the interest rate on debt averages 9.79%. The equity beta has been studied and conservatively calculated to be 1.875 while the risk-free rate of return is established to be 1.89%. The expected rate of return on the market is 10.97% and Barringer currently has 17,113,500 shares of common stock outstanding.

You have been hired by Barringer Industries Inc. to determine the following:

1. Operating Cash Flow for each of the first 5 years and the Terminal Phase
2. Free Cash Flow for each of the first 5 years and the Terminal Phase
3. What the Asset Beta (Industry Beta) is
4. What the appropriate discount rate is for valuing the firm and hence the firms stock price
5. What the asset value of the firm is
6. What the equity value of the firm is
7. What the appropriate stock price is
8. Make recommendations to improve the stock price

Your presentation must be in the form of a single professionally prepared Excel spreadsheet-multiple documents are not allowed! Focus on eye appeal that will create a flowing development throughout so clean it up and label all references. You must NOT have constant number inputs which would destroy cell referencing for future use. Be careful, you will be penalized for any and all cell referencing that is destroyed. Additionally, you are to have separate worksheet tabs for Data Entry, Operating Cash Flow, Free Cash Flow, Asset Beta, Discount Rate, Asset Value, Equity Value, Stock Price, and Recommendations. Do not submit your project early as additional requirements may be forthcoming! Should there be additional requirements-you will need a separate worksheet tab for each and every additional requirement that is assigned!