Enterprise Valuation

In the summer of 2010, Smidgeon Industries was evaluating whether or not to purchase one of its suppliers. The supplier, Carswell Manufacturing, provides Smidgeon with the raw steel Smidgeon uses to fabricate utility trailers. One of the first things that Smidgeons management did was to forecast the cash flows of Carswell for the next five years:

Year Cash Flows

1 $1,200,000

2 $1,260,000

3 $1,323,000

4 $1,389,150

5 $1,458,608

Next, Smidgeons management team looked at a group of similar firms and estimated Carswells cost of capital to be 15%. Finally, they estimated that Carswell would be worth approximately six times its Year 5 cash flow in five years.

1. What is your estimate of the enterprise value of Carswell?

2. What is the value of the equity of Carswell if the acquisition goes through and Smidgeon borrows $2.4 million and finances the remainder using equity?

Comparable Firms

Description Market Cap P/E Return on Equity % Dividend Yield % Long-Term Debt to Equity Price to Book Value Net Profit Margin Price to FreeCash Flow

Sector: Indu goods 16.606 14.94% 1.48% 0.87 50.471 5.40% 75.481

Industry: Ind equip&com 15.900 18.40% 1.41% 0.649 10.11 7.90% 134.9

EmersonEl Co $34.61B 19.276 23.72% 2.40% .0494 4.257 9.54% 65.156

Parker-Hannifin. $9.81B 14.150 18.16% 1.20% 0.308 2.298 8.25% 34.392

Roper Industrie. $4.44B 24.685 14.27% 0.50% 0.603 3.122 11.89% 232.735

Pentair Inc . $3.23B 17.943 11.56% 1.70% 0.485 1.974 4.48% 147.667

Walter Industries $2.19B 23.537 15.70% 0.30% 4.036 2.731 7.38%