Case

Stock Valuation at Ysom, Inc.

Ysom, Inc. was founded recently by Professor Shin at Yonsei University and Professor Lee at Severance Hospital which is an affiliate institute of Yonsei University. The company manufactures sleep disorder diagnostic instruments. Yonsei Corp. is expecting rapid growth because of Korean population structure where the number of people over 65 years old increases sharply. The similar population structure and change are expected in China as well.

The company is equally owned by Prof. Shin and Prof. Lee. The original partnership agreement between the professors gave each of them 50,000 shares of stock. In the event either wished to sell stock, the shares first had to be offered to the other as a discounted price.

Although neither partner wants to sell, they have decided they should value their holdings in the company. To get started, they have estimated the information about the firm.

Ysom, Inc. is expected to have sales of $1 million dollars in 2017, $2 million dollars in 2018, $4 million dollars in 2019, $10 million dollars in 2020, and its growth rate will slow to a long-run growth rate for the health instrument industry of 4% by 2021. Based on Ysom, Inc.s competitors profitability and investment needs, you expect EBIT to be 30% of sales, increases in net working capital requirements to 10% of any increase in sales, and net investment to be 15% of any increase in sales. Its tax is exempt for first 4 years because it is a startup but it will be 40% after 4 years. The weighted average cost of capital is high because it is a startup. It is very common that the required rate of return for a startup is over 30%. Lets assume that investors require 50% return on investment for similar startups, but the required return is assumed to be 15% after year 4. The company does not have any debt and the outstanding number of shares is 100,000.

What is the value per share of the companys stock? What is the value of Professor Shins Ownership?

Estimate EBIT which is 30% of sales each year. Q. Calculate EBIT in 2017 (D5 in excel template). Rounding numbers to one decimal place.

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Estimate Income tax. Row 8 in template shows tax rate each year. Q. Calculate Income tax in 2021 (H7 in excel template). Rounding numbers to one decimal place.

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Estimate Net Investment each year. Q. Calculate net investment in 2018 (E9 in excel template). Rounding numbers to one decimal place.

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Estimate Increase/Decrease in Net Working Capital (NWC) each year. You will learn NWC later in detail. Q. Calculate NWC in 2019 (F11 in excel template). Rounding numbers to one decimal place.

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Estimate Free Cash Flow each year using the method Q. Calculate Free cash flow in 2017 (D13 in excel template). Rounding numbers to one decimal place.

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Q. Calculate Terminal value as of 2020 (G14 in excel template). Rounding numbers to one decimal place

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Q. Calculate Total Free Cash Flow in 2020 which is the sum of free cash flow each year and terminal value in the last year of estimation period. That is

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Q. Calculate Present Value of Total Free Cash Flow (C17 in excel template) using the discount rate of 50%. Rounding numbers to one decimal place.

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Q. What is Enterprise Value (C18 in excel template)? Rounding numbers to one decimal place.

Q. What is the value per share of the companys stock (C19 in excel template)? Number of shares are 0.1 million.Rounding numbers to one decimal place.

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Q. What is the value of Professor Shins Ownership for millions unit (C20 in excel template)? Rounding numbers to one decimal place.