Given the information in the projected income statements, use EBITDA as a multiple to estimate the continuation value in 2010 (reproduce Table 19.15 1), assuming the EBITDA multiple for Ideko remains at 9.1x. Infer the EV/sales and the unlevered and levered P/E ratios implied by the continuation value you calculated. Also assume that Ideko's production plant will require an expansion in 2010, and that the cost of this expansion, $15.2 million, will be added to Ideko's debt in 2010. Ideko's balance sheet for 2005 is shown here : . Ideko's free cash flows through 2010 are shown here : - (Click on the following icon in order to copy its contents into a spreadsheet.) Ratio P/E EV/Sales EV/EBITDA EBITDA/Sales Oakley, Inc. 24.9x 2.2x 11.7* 16.8% Luxottica Group 28.1x 2.9% 14.5x 18.4% Nike, Inc. 18.2x 1.6x 9.3x 15.9% Sporting Goods Industry 20.4x 1.6x 11.4x 12.1% Calculate the continuation value in 2010 below: (Round the dollar amounts to the nearest $ 000.) Continuation Value: Multiples Approach ($ 000) EBITDA in 2010 EBITDA Multiple X Continuation Enterprise Value Debt Continuation Equity Value 2005 2006 2007 2008 2009 2010 72,900 88,598 99,369 111,229 124,276 138,621 Income Statement ($ 000) Sales Cost of Goods Sold Raw Materials (16,000) (19,009) (18,000) (21,096) (21,121) (23,422) (24,147) (27,585) (25,926) (31,456) (28,649) (35,810) Direct Labor Costs Gross Profit 38,900 48,493 54,101 60,222 66,894 74,162 Sales and Marketing (17,708) (21,489) (14,717) (15,361) (24,632) (15,920) (27,475) (17,757) Administrative (11,250) (14,459) (13,500) (13,121) 14,150 20,913 (5,500) (6,000) EBITDA 21,676 23,372 26,342 28,930 (7,245) Depreciation (5,920) (5,848) (5,783) EBIT 8,650 14,913 15,756 17,524 20,559 21,685 Interest Expense (net) (75) (6,590) (6,590) (6,590) (6,590) (6,590) Pretax Income 8,575 9,166 10,934 13,969 8,323 (2,913) 15,095 (5,283) Income Tax (3,001) (3,208) (3,827) (4,889) Net Income 5,574 5,410 5,958 7,107 9,080 9,812 TABLE 19.15 SPREADSHEET Continuation Value Estimate for Ideko Continuation Value: Multiples Approach ($ 000) 1 EBITDA in 2010 32,094 2 EBITDA multiple 9.1 x 3 Continuation Enterprise Value 292,052 4 Debt (120,000) Continuation Equity Value 172,052 Common Multiples EV/Sales P/E (levered) P/E (unlevered) 1.8% 16.3x 18.4x 5 Balance Sheet ($ 000) Assets Cash and Equivalents Accounts Receivable Inventories Total Current Assets Property, Plant, and Equipment Goodwill Total Assets 6,164 17,975 6,165 30,304 54,800 72,332 157,436 Liabilities and Stockholders' Equity Accounts Payable 4,654 Debt 100,000 Total Liabilities 104,654 Stockholders' Equity 52,782 Total Liabilities and Equity 157,436 Estimated 2005 Balance Sheet Data for Ideko Corporation Free Cash Flow ($ 000) 2005 2006 2007 2008 2009 2010 Net Income 5,410 5,958 7,107 9,080 9,812 Plus: After-tax Interest Expense 4,284 4,284 4,284 4,284 4,284 Unlevered Net Income 9,694 10,242 11,391 13,364 14,096 Plus: Depreciation 6,000 5,848 5,783 7,245 5,920 (3,586) Less: Increase in NWC (5,407) (5,200) (3,973) (5,200) (4,504) (5,200) Less: Capital Expenditures (5,200) (4,987) (20,400) (4,046) Free Cash Flow of Firm 5,087 7,376 8,066 9,443 Plus: Net Borrowing 15,200 Less: After-tax Interest Expense (4,284) (4,284) (4,284) (4,284) (4,284) Free Cash Flow to Equity 803 3,092 3,782 3,782 6,870 Given the information in the projected income statements, use EBITDA as a multiple to estimate the continuation value in 2010 (reproduce Table 19.15 1), assuming the EBITDA multiple for Ideko remains at 9.1x. Infer the EV/sales and the unlevered and levered P/E ratios implied by the continuation value you calculated. Also assume that Ideko's production plant will require an expansion in 2010, and that the cost of this expansion, $15.2 million, will be added to Ideko's debt in 2010. Ideko's balance sheet for 2005 is shown here : . Ideko's free cash flows through 2010 are shown here : - (Click on the following icon in order to copy its contents into a spreadsheet.) Ratio P/E EV/Sales EV/EBITDA EBITDA/Sales Oakley, Inc. 24.9x 2.2x 11.7* 16.8% Luxottica Group 28.1x 2.9% 14.5x 18.4% Nike, Inc. 18.2x 1.6x 9.3x 15.9% Sporting Goods Industry 20.4x 1.6x 11.4x 12.1% Calculate the continuation value in 2010 below: (Round the dollar amounts to the nearest $ 000.) Continuation Value: Multiples Approach ($ 000) EBITDA in 2010 EBITDA Multiple X Continuation Enterprise Value Debt Continuation Equity Value 2005 2006 2007 2008 2009 2010 72,900 88,598 99,369 111,229 124,276 138,621 Income Statement ($ 000) Sales Cost of Goods Sold Raw Materials (16,000) (19,009) (18,000) (21,096) (21,121) (23,422) (24,147) (27,585) (25,926) (31,456) (28,649) (35,810) Direct Labor Costs Gross Profit 38,900 48,493 54,101 60,222 66,894 74,162 Sales and Marketing (17,708) (21,489) (14,717) (15,361) (24,632) (15,920) (27,475) (17,757) Administrative (11,250) (14,459) (13,500) (13,121) 14,150 20,913 (5,500) (6,000) EBITDA 21,676 23,372 26,342 28,930 (7,245) Depreciation (5,920) (5,848) (5,783) EBIT 8,650 14,913 15,756 17,524 20,559 21,685 Interest Expense (net) (75) (6,590) (6,590) (6,590) (6,590) (6,590) Pretax Income 8,575 9,166 10,934 13,969 8,323 (2,913) 15,095 (5,283) Income Tax (3,001) (3,208) (3,827) (4,889) Net Income 5,574 5,410 5,958 7,107 9,080 9,812 TABLE 19.15 SPREADSHEET Continuation Value Estimate for Ideko Continuation Value: Multiples Approach ($ 000) 1 EBITDA in 2010 32,094 2 EBITDA multiple 9.1 x 3 Continuation Enterprise Value 292,052 4 Debt (120,000) Continuation Equity Value 172,052 Common Multiples EV/Sales P/E (levered) P/E (unlevered) 1.8% 16.3x 18.4x 5 Balance Sheet ($ 000) Assets Cash and Equivalents Accounts Receivable Inventories Total Current Assets Property, Plant, and Equipment Goodwill Total Assets 6,164 17,975 6,165 30,304 54,800 72,332 157,436 Liabilities and Stockholders' Equity Accounts Payable 4,654 Debt 100,000 Total Liabilities 104,654 Stockholders' Equity 52,782 Total Liabilities and Equity 157,436 Estimated 2005 Balance Sheet Data for Ideko Corporation Free Cash Flow ($ 000) 2005 2006 2007 2008 2009 2010 Net Income 5,410 5,958 7,107 9,080 9,812 Plus: After-tax Interest Expense 4,284 4,284 4,284 4,284 4,284 Unlevered Net Income 9,694 10,242 11,391 13,364 14,096 Plus: Depreciation 6,000 5,848 5,783 7,245 5,920 (3,586) Less: Increase in NWC (5,407) (5,200) (3,973) (5,200) (4,504) (5,200) Less: Capital Expenditures (5,200) (4,987) (20,400) (4,046) Free Cash Flow of Firm 5,087 7,376 8,066 9,443 Plus: Net Borrowing 15,200 Less: After-tax Interest Expense (4,284) (4,284) (4,284) (4,284) (4,284) Free Cash Flow to Equity 803 3,092 3,782 3,782 6,870