Based on Deana's preference for the Corporate Value Model, what would the company's selling price per share be if they were to issue 30 million shares?

Valuation Case Study A Company Valuation Case Study Ka-Bang! Cleaning Supplies, Inc. When Ryan Bang concocted his cleaning compound, some twenty years ago, all that his wife, Riki, and he were trying to do was to come up with a sweeter, gentler, yet tougher, cleaning product. Little did he realize that someday he would be the proud owner of a multi-million dollar firm debating whether or not to sell stock to the public? After having peddled vacuum cleaners and floor wax products at state fairs and trade shows throughout the Midwest, Ryan and Riki realized that there was a dire need for a cleaning and polishing product that was free from harsh chemicals, environmentally friendly, and tough on dirt and grime. So Ryan spent many hours in his garage at their country home experimenting with various oils, cleansing agents, and extracts until he finally came up with what he proudly calls: Ka-Bang!" "The perfect cleaner and polish" made from the peels of Valencia oranges. Not only was the mixture sweet smelling, it was an effective solvent and degreaser which worked wonders on their kitchen cabinets at home. So spurred on by their close friends, the family formed their own company, Ka-Bang! Cleaning Supplies, Inc. Later with the help of their 3 children, Deana, Dan, and Dave, they used direct response television, direct mail, and e-commerce channels to help grow the company's revenues at a phenomenal rate. When the Home Shopping Network agreed to let them show off their merchandise about 5 years ago, major retailers like Wal-Mart and Costco took notice and started stocking their product on their shelves. Within twenty years, their sales had grown to over $500 million and their production facilities were beginning to feel the strain. Their product line had expanded to include air fresheners, soap bars, liquid soaps, spot removers, and a variety of cleaning tools. Through all this success, the family always focused on customer need and satisfaction, always encouraging their customers to provide them with feedback and testimonials. Their latest addition, i.e. an industrial-strength cleanser and wood protector, seemed to be gaining wide acceptance both in the United States and overseas. Ryan, who was nearing 75 years of age, knew that they would need to raise significant amounts of capital if they wanted to keep growing and expanding their product line. Still actively involved in the business, he had asked the rest of his family for their suggestions regarding the possibility of going public by issuing an initial public offering (IPO). Deana and Dave strongly supported the idea because they felt that with competitors coming up with substitute products, they needed to stay ahead of the game. Dan, on the other hand, disagreed and recommended that they outsource the production and concentrate on their marketing efforts. He preferred that the firm stay private, thereby, relying less on external capital and retaining control. After carefully weighing all the factors, Ryan decided to explore the possibility of raising the money via an IPO. "Dan, Deana, and Dave," he said, "the three of you have MBAs from the most prestigious business school in the country (Northwood University, obviously). I hate to depend totally on the investment banking folks to come up with the right price. Why don't the three of you put your heads together and figure out what is the minimum price that we should sell our stock for if we were to go public. Let's say we sell 30 million shares. I'm sure we can find a way of retaining control of a large portion of the shareholding and still raise the much-needed cash. Dan's point of loss of control is a good one, but I am not in favor of outsourcing production. Our success has come from our quality and that would likely be jeopardized if we let others produce the product." So Deana, Dan, and Dave got to work. They realized that they would need industry and competitors' financial data. Figure 1 presents key valuation data for three of their major publicly traded competitors in the personal and household products industry sector. Figures 2 and 3 present the company's past 5-year income statements and balance sheets respectively. Deana preferred to use the Corporate Value Model whereby the firm's value was estimated as the sum of its discounted free-cash flows. Free cash flows were estimated by subtracting the firm's net capital investment from the year's net operating profits after taxes (NOPAT) and were discounted at a suitable risk-adjusted discount rate (weighted average cost of capital). Deana assumed that the firm's free cash flows would grow at a rate of 20% during the first year, 10% during the second year, and finally settle down to a long-term growth rate of 5.6% thereafter. The firm's equity value was calculated by subtracting out the firm's outstanding debt owed to creditors from the overall value. Deana used a risk-free rate of 3%, a market risk premium of 7%, and the average beta of the three competitors when determining the firm's cost of equity. It should also be noted that the company's tax rate is estimated at 40% going forward. Having worked on various valuation projects for a major consulting firm, Dan was a strong advocate of the use of multiples models for valuing common stock. His method involved using suitable price- earnings, price-sales, price-book value, and price-cash flow multiples in conjunction with forecasted values for the firm's earnings, sales, book value, and cash flows respectively. Dan used the 4-year average compounded growth rate when forecasting the relevant variables and then discounted the year-ahead price forecasts by the required rate of return on equity (based on the Capital Asset Pricing Model using the same inputs that Deana used). Dave's old finance professor, Dr. Dennis Witherspoon, on the other hand, had indoctrinated him in the art of common stock valuation via the discounting of future dividends. "Always use a realistic required rate of return and various growth rate scenarios in conjunction with industry benchmarks, when valuing growth companies," was Dr. Witherspoon's advice. Accordingly, Dave decided to use a variable growth rate model to value the firm's equity with growth assumptions of 30% for the first three years, followed by 20% for the next two years, and a long-term growth assumption of 5.6% thereafter. The company's most recent dividend was $1.25 per share. "What will we do if our three estimates are totally different?" asked Deana looking rather concerned. "We'll have to go back to the drawing table and examine our inputs," said the ever-resourceful Dan, "We'll each have to be within a reasonable ballpark, or Dad's going to flip!" Figure 1 Key Valuation Ratios for Top 3 Competitors Company A Company B Company Price / Earnings 23.6 24.6 22.8 Price / Book 8.7 12.1 4.2 Price / Sales 2.9 2.8 2.9 Price / Cash Flow 12 16.7 14.7 Dividend Yield % 2 1.6 1.7 Beta 1.2 1.3 1.15 Recent Price $62.47 $57.29 $57.3 Figure 2 Income Statements Ka-Boom! Cleaning Supplies, Inc. 2014 2015 2016 2017 2018 Revenue 100,100,000 225,000,000 300,250,000 400,150,000 500,000,000 COGS (45,315,000) (108,000,000) (147,122,500) (184,069,000) (255,000,000) Gross Profit 54,785,000 117,000,000 153, 127,500 216,081,000 245,000,000 Depreciation (3,061,646) (3,600,000) (4,206,746) (7,042,640) (9,703,125) Operating Expenses (33,231,000) (72,000,000) (87,072,500) (141,653,100) (140,000,000) Earnings Before Interest and Taxes 18,492,354 41,400,000 61,848,254 67,385,260 95,296,875 Interest Expense (1,743,025) (2,760,000) (1,876,865) (5,165,760) (8,006,250) Earnings Before Taxes 16,749,329 38,640,000 59,971,389 62,219,500 87,290,625 Income Taxes (9,327,265) (13,524,000) (20,989,986) (21,776,825) (30,551,719) Net Income 7,422,064 25,116,000 38,981,403 40,442,675 56,738,906 Figure 3 Balance Sheets Figure 3 Balance Sheets Ka-Boom! Cleaning Supplies, Inc. 2014 2015 2016 2017 2018 Current Assets 25,049,832 39,000,000 45,573,081 57,621,600 64,687,500 Fixed Assets 30,616,462 36,000,000 42,067,459 70,426,400 97,031,250 Total Assets 55,666,294 75,000,000 87,640,540 128,048,000 161,718,750 Current Liabilities 4,329,601 4,600,000 3,128,108 8,609,600 13,343,750 Long Term Debt (@15% per year) 26,336,694 18,400,000 12,512,432 34,438,400 53,375,000 Owners' Equity 25,000,000 52,000,000 72,000,000 85,000,000 95,000,000 Total Liabilities & Owners' Equity 55,666,295 75,000,000 87,640,540 128,048,000 161,718,750 Valuation Case Study A Company Valuation Case Study Ka-Bang! Cleaning Supplies, Inc. When Ryan Bang concocted his cleaning compound, some twenty years ago, all that his wife, Riki, and he were trying to do was to come up with a sweeter, gentler, yet tougher, cleaning product. Little did he realize that someday he would be the proud owner of a multi-million dollar firm debating whether or not to sell stock to the public? After having peddled vacuum cleaners and floor wax products at state fairs and trade shows throughout the Midwest, Ryan and Riki realized that there was a dire need for a cleaning and polishing product that was free from harsh chemicals, environmentally friendly, and tough on dirt and grime. So Ryan spent many hours in his garage at their country home experimenting with various oils, cleansing agents, and extracts until he finally came up with what he proudly calls: Ka-Bang!" "The perfect cleaner and polish" made from the peels of Valencia oranges. Not only was the mixture sweet smelling, it was an effective solvent and degreaser which worked wonders on their kitchen cabinets at home. So spurred on by their close friends, the family formed their own company, Ka-Bang! Cleaning Supplies, Inc. Later with the help of their 3 children, Deana, Dan, and Dave, they used direct response television, direct mail, and e-commerce channels to help grow the company's revenues at a phenomenal rate. When the Home Shopping Network agreed to let them show off their merchandise about 5 years ago, major retailers like Wal-Mart and Costco took notice and started stocking their product on their shelves. Within twenty years, their sales had grown to over $500 million and their production facilities were beginning to feel the strain. Their product line had expanded to include air fresheners, soap bars, liquid soaps, spot removers, and a variety of cleaning tools. Through all this success, the family always focused on customer need and satisfaction, always encouraging their customers to provide them with feedback and testimonials. Their latest addition, i.e. an industrial-strength cleanser and wood protector, seemed to be gaining wide acceptance both in the United States and overseas. Ryan, who was nearing 75 years of age, knew that they would need to raise significant amounts of capital if they wanted to keep growing and expanding their product line. Still actively involved in the business, he had asked the rest of his family for their suggestions regarding the possibility of going public by issuing an initial public offering (IPO). Deana and Dave strongly supported the idea because they felt that with competitors coming up with substitute products, they needed to stay ahead of the game. Dan, on the other hand, disagreed and recommended that they outsource the production and concentrate on their marketing efforts. He preferred that the firm stay private, thereby, relying less on external capital and retaining control. After carefully weighing all the factors, Ryan decided to explore the possibility of raising the money via an IPO. "Dan, Deana, and Dave," he said, "the three of you have MBAs from the most prestigious business school in the country (Northwood University, obviously). I hate to depend totally on the investment banking folks to come up with the right price. Why don't the three of you put your heads together and figure out what is the minimum price that we should sell our stock for if we were to go public. Let's say we sell 30 million shares. I'm sure we can find a way of retaining control of a large portion of the shareholding and still raise the much-needed cash. Dan's point of loss of control is a good one, but I am not in favor of outsourcing production. Our success has come from our quality and that would likely be jeopardized if we let others produce the product." So Deana, Dan, and Dave got to work. They realized that they would need industry and competitors' financial data. Figure 1 presents key valuation data for three of their major publicly traded competitors in the personal and household products industry sector. Figures 2 and 3 present the company's past 5-year income statements and balance sheets respectively. Deana preferred to use the Corporate Value Model whereby the firm's value was estimated as the sum of its discounted free-cash flows. Free cash flows were estimated by subtracting the firm's net capital investment from the year's net operating profits after taxes (NOPAT) and were discounted at a suitable risk-adjusted discount rate (weighted average cost of capital). Deana assumed that the firm's free cash flows would grow at a rate of 20% during the first year, 10% during the second year, and finally settle down to a long-term growth rate of 5.6% thereafter. The firm's equity value was calculated by subtracting out the firm's outstanding debt owed to creditors from the overall value. Deana used a risk-free rate of 3%, a market risk premium of 7%, and the average beta of the three competitors when determining the firm's cost of equity. It should also be noted that the company's tax rate is estimated at 40% going forward. Having worked on various valuation projects for a major consulting firm, Dan was a strong advocate of the use of multiples models for valuing common stock. His method involved using suitable price- earnings, price-sales, price-book value, and price-cash flow multiples in conjunction with forecasted values for the firm's earnings, sales, book value, and cash flows respectively. Dan used the 4-year average compounded growth rate when forecasting the relevant variables and then discounted the year-ahead price forecasts by the required rate of return on equity (based on the Capital Asset Pricing Model using the same inputs that Deana used). Dave's old finance professor, Dr. Dennis Witherspoon, on the other hand, had indoctrinated him in the art of common stock valuation via the discounting of future dividends. "Always use a realistic required rate of return and various growth rate scenarios in conjunction with industry benchmarks, when valuing growth companies," was Dr. Witherspoon's advice. Accordingly, Dave decided to use a variable growth rate model to value the firm's equity with growth assumptions of 30% for the first three years, followed by 20% for the next two years, and a long-term growth assumption of 5.6% thereafter. The company's most recent dividend was $1.25 per share. "What will we do if our three estimates are totally different?" asked Deana looking rather concerned. "We'll have to go back to the drawing table and examine our inputs," said the ever-resourceful Dan, "We'll each have to be within a reasonable ballpark, or Dad's going to flip!" Figure 1 Key Valuation Ratios for Top 3 Competitors Company A Company B Company Price / Earnings 23.6 24.6 22.8 Price / Book 8.7 12.1 4.2 Price / Sales 2.9 2.8 2.9 Price / Cash Flow 12 16.7 14.7 Dividend Yield % 2 1.6 1.7 Beta 1.2 1.3 1.15 Recent Price $62.47 $57.29 $57.3 Figure 2 Income Statements Ka-Boom! Cleaning Supplies, Inc. 2014 2015 2016 2017 2018 Revenue 100,100,000 225,000,000 300,250,000 400,150,000 500,000,000 COGS (45,315,000) (108,000,000) (147,122,500) (184,069,000) (255,000,000) Gross Profit 54,785,000 117,000,000 153, 127,500 216,081,000 245,000,000 Depreciation (3,061,646) (3,600,000) (4,206,746) (7,042,640) (9,703,125) Operating Expenses (33,231,000) (72,000,000) (87,072,500) (141,653,100) (140,000,000) Earnings Before Interest and Taxes 18,492,354 41,400,000 61,848,254 67,385,260 95,296,875 Interest Expense (1,743,025) (2,760,000) (1,876,865) (5,165,760) (8,006,250) Earnings Before Taxes 16,749,329 38,640,000 59,971,389 62,219,500 87,290,625 Income Taxes (9,327,265) (13,524,000) (20,989,986) (21,776,825) (30,551,719) Net Income 7,422,064 25,116,000 38,981,403 40,442,675 56,738,906 Figure 3 Balance Sheets Figure 3 Balance Sheets Ka-Boom! Cleaning Supplies, Inc. 2014 2015 2016 2017 2018 Current Assets 25,049,832 39,000,000 45,573,081 57,621,600 64,687,500 Fixed Assets 30,616,462 36,000,000 42,067,459 70,426,400 97,031,250 Total Assets 55,666,294 75,000,000 87,640,540 128,048,000 161,718,750 Current Liabilities 4,329,601 4,600,000 3,128,108 8,609,600 13,343,750 Long Term Debt (@15% per year) 26,336,694 18,400,000 12,512,432 34,438,400 53,375,000 Owners' Equity 25,000,000 52,000,000 72,000,000 85,000,000 95,000,000 Total Liabilities & Owners' Equity 55,666,295 75,000,000 87,640,540 128,048,000 161,718,750