Dash Riprock, mergers and acquisitions consultant extraordinaire, was in the final stages of estimating the value of Makes You Better Corp. Makes You Better is a biopharmaceutical company located in Eastern Europe. I Wanna Get Bigger, Inc., a U.S.-based pharmaceuticals company, was considering the acquisition of Makes You Better and had retained Riprock to estimate a fair value.

Riprock had obtained data on trading multiples for a sample of companies comparable to Makes You Better. These companies were also in the biopharmaceuticals industry. Multiples for the comparable companies are shown in Exhibit 1. Values for Makes You Better were calculated by applying the mean and median values of the trading multiples to the appropriate bases for Makes You Better. The results are shown in Exhibit 2. Regarding the estimation of an overall value for Makes You Better using the trading multiples, Riprock was concerned about the dispersion in the various ratios and the potential for outliers to unduly influence the results.

Riprock had also estimated values for Makes You Better using a discounted cash flow methodology, utilizing data obtained from Makes You Better and independent sources. One key factor was whether or not Makes You Better would gain access to the Western European Market in 2011. Riprock estimated the discounted cash flow value assuming entry into Western Europe (Exhibit 3) and assuming no entry into Western Europe (Exhibit 4). Industry consultants were slightly more inclined to believe that Makes You Better would gain entry into Western Europe as opposed to not gaining entry.

Riprock was now faced with the task of utilizing the analysis to estimate the value of Makes You Better. He believed that both methods had their strengths and weaknesses. He was slightly more confident in the discounted cash flow methodology.

1. Estimate the value of Makes-You-Better using trading multiples.

2. Estimate the value of Makes-You-Better using discounted cash flow analysis.

3. Estimate the value of Makes-You-Better. In other words, use any or all of the analysis to determine how much you would be willing to pay for Makes-You-Better.

Exhibit 1

Multiples for Comparable Companies, 2007

Company	Ratio of Stock Price to Annual Revenue	Ratio of Stock Price to Net Income	Ratio of Stock Price to Book Equity	Ratio of Stock Price to EBT	Ratio of Stock Price to EBIT
Makes You Sleepy	121.90	NA	4.90	NA	NA
Makes You Anxious	NA	NA	NA	NA	NA
Make You Hungry	7.00	53.70	3.10	44.57	99.83
Makes You Crazy	NA	66.70	NA	NA	NA
Makes You Hairy	18.60	106.30	8.70	102.34	148.94
Makes You Vomit	2.50	NA	10.30	NA	NA
Mean	37.50	75.57	6.75	73.45	124.38
Median	12.80	66.70	6.80	73.45	124.38

Exhibit 2

Value of Makes You Better in 2007 Using Comparables

				Guideline Mean		Makes You Better Value ($ M)	Guideline Median	Makes You Better Value ($ M)
Stock price/Net Income				75.57		$49,605	66.70	$46,030
Stock price/Book Equity				6.75		$24,031	6.80	$24,209
Stock price/Annual Revenue				37.50		$106,488	12.80	$48,961
Stock price / EBT				73.45		$48,751	73.45	$48,751
Stock price / EBIT				124.38		$87,810	124.38	$87,810

Note: Makes You Better 2007 amounts (in Millions $): Net Income = $403, Book Equity = $744, Revenue=$2,329, EBT = 403, and EBIT = $552. Makes You Better values reflect the estimated equity values plus $19,150,000 of debt (long-term plus current portion of long-term).

Exhibit 3

Discounted Cash Flow Valuation

Assuming Country-Adjusted Cost of Capital and Entry into Western Europe

	Actual
	2007	2008	2009	2010	2011	2012
Revenue	$2,329	$5,682	$5,739	$12,915	$20,505	$27,775
Expenses (A)	1,926	4,887	4,934	10,918	17,247	23,309
EBT	$403	$795	$805	$1,997	$3,258	$4,466
Tax (B)	0	0	0	0	0	0
Net Income	$539	$795	$805	$1,997	$3,258	$4,466
Operating Cash Flow (C)	$688	$2,313	$2,860	$3,450	$4,676	$5,911
Terminal Value (D)						$48,524
Total Cash Flow	$688	$2,313	$2,860	$3,450	$4,676	$54,435
		2008	2009	2010	2011	2012
Total Cash Flow		$2,313	$2,860	$3,450	$4,676	$54,435
Present Value		$35,534
Marketable Securities		1,500
Total Value		$37,034
Discount Rate	15.47%
Terminal Growth Rate	5.0%

Notes:

A. COGS is expected to be a constant 15% of sales over the 2007-2012 period. SG&A is expected to be a constant 68% of sales over the 2007-2012 period. These are assumed to include depreciation of the new facility. Makes You Better does not pay taxes for the period 2007 -2012; its tax rate after 2012 is assumed to be 24%. Operating cash flow is computed as net income plus interest expense, plus depreciation expense, minus the increase in net working capital, minus capital expenditures. Depreciation is added back for the new facility. Capital expenditures are assumed to offset other depreciation. The terminal value is computed using cash flow for 2012 (minus taxes of 24% on income), capitalized at the cost of capital.

Exhibit 4

Discounted Cash Flow Valuation

Assuming Country-Adjusted Cost of Capital and No Entry into Western Europe

	Actual
	2007	2008	2009	2010	2011	2012
Revenue	$2,329	$5,682	$5,739	$7,515	$10,605	$12,475
Expenses (A)	1,926	4,887	4,934	6,415	8,992	10,551
EBT	$403	$795	$805	$1,100	$1,613	$1,924
Tax (B)	0	0	0	0	0	0
Net Income	$539	$795	$805	$1,100	$1,613	$1,924
Operating Cash Flow (C)	$688	$2,313	$2,860	$2,553	$3,031	$3,369
Terminal Value (D)						$29,150
Total Cash Flow	$688	$2,313	$2,860	$2,553	$3,031	$32,519
		2008	2009	2010	2011	2012
Total Cash Flow		$2,313	$2,860	$2,553	$3,031	$32,519
Present Value		$23,350
Marketable Securities		1,500
Total Value		$24,850
Discount Rate	15.47%
Terminal Growth Rate	5.0%

Notes:

A. COGS is expected to be a constant 15% of sales over the 2007-2012 period. SG&A is expected to be a constant 68% of sales over the 2007-2012 period. These are assumed to include depreciation of the new facility. Makes You Better does not pay taxes for the period 2007 -2012; its tax rate after 2012 is assumed to be 24%. Operating cash flow is computed as net income plus interest expense, plus depreciation expense, minus the increase in net working capital, minus capital expenditures. Depreciation is added back for the new facility. Capital expenditures are assumed to offset other depreciation. The terminal value is computed using cash flow for 2012 (minus taxes of 24% on income), capitalized at the cost of capital.