Horizon Valuation and Growth. The case provides projections of cash flow components out for five years. The full value of Mercury will depend on the cash flows to the horizon plus the cash flows beyond the horizon (the present value of the horizon value). Year 1 is 2007. The horizon is at year end 2010. Year end 2011 is the first year beyond H. To do the horizon valuation in the base case, you will have to apply a growth rate for cash flows beyond H. This long term growth rate depends on your assessment of the sustainability of competitive advantage. In making an assessment of long term growth sustainability, reflect on the risk involved. What does this risk say about the relative importance of the PV to H versus the PV beyond H? A discussion of this issue is recommended.

Growth rate=3%

EBIT Margin = 9%

nominal & risk adjusted discount rate =15%

Tax rate= 40%

2006 (Actual) $431,121.00 2007 2008 2009 2010 2011 $479,328.82 $489,028.03 $532,136.82 $570,318.96 $597,716.67 $239,383.00 Sales Costs and Expenses (income): COGS Other Operating Expenses Total Operating Expenses (includes an allocation of depreciation) Estimated Depreciation Cash Operating Expenses (10-11) EBITDA Estimated Depreciation Corporate Overhead Profit before tax (EBIT) Profit after tax EBIAT $266,150.73 $271,536.29 $295,472.75 $316,673.66 $331,886.43 $157,686.00 $155,797.00 $169,637.00 $181,861.00 $190,636.00 $423,836.73 $427,333.29 $465,109.75 $498,534.66 $522,522.43 $9,587.00 $9,781.00 $10,643.00 $11,406.00 $11,954.00 $414,249.73 $417,552.29 $454,466.75 $487,128.66 $510,568.43 $56,592.09 $62,816.74 $68,248.07 $73,092.30 $76,565.24 $9,587.00 $9,781.00 $10,643.00 $ 11,406.00 $11,954.00 $8,487.00 $8,659.00 $9,422.00 $10,098.00 $10,583.00 $ 47,005.09 $53,035.74 $57,605.07 $61,686.30 $64,611.24 $28,203.05 $31,821.45 $34,563.04 $37,011.78 $38,766.74 Investment in new capital (fixed assets/estimated capital expenditures) Total Current Assets (sum of cash, AR, Inventory, Prepaid Expenses) Total Current Liabilities (sum of AP and accrued expenses) Net working capital (equals total assets - total liabilities or 19-20) Change in Net Working Capital Free cash flow = EBIT*(1-T)+depreciation - change in NWC-Capex $139,908.00 $35,791.00 $104,117.00 $11,983.00 $12,226.00 $13,303.00 $14,258.00 $14,943.00 $150,293.00 $153,283.00 $166,798.00 $178,766.00 $187,354.00 $41,608.00 $41,951.00 $45,660.00 $48,941.00 $51,295.00 $108,685.00 $111,332.00 $121,138.00 $129,825.00 $136,059.00 $4,568.00 $2,647.00 $9,806.00 $8,687.00 $6,234.00 $21,239.05 $26,729.45 $22,097.04 $25,472.78 $29,543.74 PV Horizon value PV 2007-2010 PV Company 2011 Horizon Value $122,403.85 $67,773.35 $190,177.19 $246,197.85 Base Case Assumptions: Discount Rate price growth Volume growth (percent) COGS(percent) 0.15 3.00 4.00 0.555257109 Tax rate, percent 40.0 0.40 Sensitivity Analysis Debt Ratio on PV of Company Debt Ratio (D/V) Discount Rate PV of Horizon Value (2011) PV of 2007-2010 PV of Company 10% 0.10 $168,156.45 $75,398.77 $243,555.21 20% 30% 40% 50% 0.12 0.15 0.18 0.20 $156,463.19 $140,764.42 $126,986.11 $118,729.68 $72,188.64 $67,773.35 $63,783.39 $61,333.29 $228,651.83 $208,537.77 $190,769.50 $180,062.97 Sensitivity Analysis WACC, Growth Rate effects on PV Value of Company Growth Rate 0% $309,641.89 $277,186.50 $250,686.99 $228,651.83 1% 2% 3% 4% WACC $338,710.69 $329,326.21 $365,359.73 $413,404.43 $299,607.36 $263,154.59 $284,016.35 $310,093.55 $268,379.16 $203,701.76 $214,529.80 $227,326.56 $242,875.75 $177,295.44 $184,803.06 $193,465.71 9% 10% 11% 12% 2006 (Actual) $431,121.00 2007 2008 2009 2010 2011 $479,328.82 $489,028.03 $532,136.82 $570,318.96 $597,716.67 $239,383.00 Sales Costs and Expenses (income): COGS Other Operating Expenses Total Operating Expenses (includes an allocation of depreciation) Estimated Depreciation Cash Operating Expenses (10-11) EBITDA Estimated Depreciation Corporate Overhead Profit before tax (EBIT) Profit after tax EBIAT $266,150.73 $271,536.29 $295,472.75 $316,673.66 $331,886.43 $157,686.00 $155,797.00 $169,637.00 $181,861.00 $190,636.00 $423,836.73 $427,333.29 $465,109.75 $498,534.66 $522,522.43 $9,587.00 $9,781.00 $10,643.00 $11,406.00 $11,954.00 $414,249.73 $417,552.29 $454,466.75 $487,128.66 $510,568.43 $56,592.09 $62,816.74 $68,248.07 $73,092.30 $76,565.24 $9,587.00 $9,781.00 $10,643.00 $ 11,406.00 $11,954.00 $8,487.00 $8,659.00 $9,422.00 $10,098.00 $10,583.00 $ 47,005.09 $53,035.74 $57,605.07 $61,686.30 $64,611.24 $28,203.05 $31,821.45 $34,563.04 $37,011.78 $38,766.74 Investment in new capital (fixed assets/estimated capital expenditures) Total Current Assets (sum of cash, AR, Inventory, Prepaid Expenses) Total Current Liabilities (sum of AP and accrued expenses) Net working capital (equals total assets - total liabilities or 19-20) Change in Net Working Capital Free cash flow = EBIT*(1-T)+depreciation - change in NWC-Capex $139,908.00 $35,791.00 $104,117.00 $11,983.00 $12,226.00 $13,303.00 $14,258.00 $14,943.00 $150,293.00 $153,283.00 $166,798.00 $178,766.00 $187,354.00 $41,608.00 $41,951.00 $45,660.00 $48,941.00 $51,295.00 $108,685.00 $111,332.00 $121,138.00 $129,825.00 $136,059.00 $4,568.00 $2,647.00 $9,806.00 $8,687.00 $6,234.00 $21,239.05 $26,729.45 $22,097.04 $25,472.78 $29,543.74 PV Horizon value PV 2007-2010 PV Company 2011 Horizon Value $122,403.85 $67,773.35 $190,177.19 $246,197.85 Base Case Assumptions: Discount Rate price growth Volume growth (percent) COGS(percent) 0.15 3.00 4.00 0.555257109 Tax rate, percent 40.0 0.40 Sensitivity Analysis Debt Ratio on PV of Company Debt Ratio (D/V) Discount Rate PV of Horizon Value (2011) PV of 2007-2010 PV of Company 10% 0.10 $168,156.45 $75,398.77 $243,555.21 20% 30% 40% 50% 0.12 0.15 0.18 0.20 $156,463.19 $140,764.42 $126,986.11 $118,729.68 $72,188.64 $67,773.35 $63,783.39 $61,333.29 $228,651.83 $208,537.77 $190,769.50 $180,062.97 Sensitivity Analysis WACC, Growth Rate effects on PV Value of Company Growth Rate 0% $309,641.89 $277,186.50 $250,686.99 $228,651.83 1% 2% 3% 4% WACC $338,710.69 $329,326.21 $365,359.73 $413,404.43 $299,607.36 $263,154.59 $284,016.35 $310,093.55 $268,379.16 $203,701.76 $214,529.80 $227,326.56 $242,875.75 $177,295.44 $184,803.06 $193,465.71 9% 10% 11% 12%