HUBB, Inc. is keen on acquiring Compac, Inc., a privately-owned consumer electronics and computer retail company. As a hired consultant, your role is to assist HUBB, Inc. in this acquisition process. To accomplish this, please address the following requirements: 

 

1. Perform a comprehensive ratio analysis for Compac, Inc. a- Compute six financial ratios for the year 2023, covering three profitability ratios (including ROA and ROE/ROCE) and three risk analysis ratios. (20 pts) b- Utilize data from the past four years to carry out a financial ratio analysis for the company. Contrast Compac's 2023 ratios with industry benchmarks; identify and discuss any discrepancies while offering a thoughtful analysis (10 pts) 

 

2. Develop cash flow statements. a- Cash flow statements for the period from 2024 to 2028. (20 pts) b- Evaluate the quality of earnings for the projected years. (10 pts) 

 

3. Compute the Free Cash Flow for the years 2024 through 2028. a- Free Cash Flow to Equity (FCFE) (20 pts) b- Free Cash Flow to Firm (FCFF) (20 pts) 

 

4. Estimate Compac, Inc.'s stock intrinsic value in 2023 utilizing the following valuation models: a- Dividend Discount Model (DDM), (20 pts) b- Discounted Cash Flow (DCF), and (20 pts) c- Residual Income Model (RIM) valuation methods. (20 pts)

 

 5. Establish the company's stock value in 2023 using Comparable Company Analysis (Comps). Utilize at least three valuation ratios like EV/Revenue, Price/Sales, Price/Book Value, and Price/Earnings for this purpose. (15 pts) 6. Based on your valuation results, offer a recommendation on whether to proceed with the acquisition. Make sure to substantiate your recommendation with a thorough discussion. (15 pts)

 

Assumption: 

 

Expected Risk free	4%
Expected market return	10%
Expected market price of shares for the next five years	$72
number of shares outstanding	10,000,000
Market value of debt	Book value of debt
Common par	$0
Preferred par	$1,000
Market value of preferred	Book value of preferred
The growth rate after 2028 for dividend, net income, and cash flows	3%
tax rate	21%

 

Industry Average Beta Information

	Number of firms	Average Unlevered Beta	Average Levered Beta	Average correlation with the market	Total Unlevered Beta	Total Levered Beta
Industry Name
Computers/ Peripherals	42	1.23	1.29	29.41%	4.17	4.39

 

Market Multiple Valuation Data

Comparable Company Analysis ( $ in thousands)							Date	3/31/2023
			Financial Metrics			Multiples
Name	Market Cap	EV	Earnings	Sales	BV	EV/Rev	P/Sales	P/B	P/E
Company A	$850,000	$30,850,000	$68,652	$148,540	$153,750	207.69	5.72	11.35	8.56
Company B	$790,000	$32,790,000	$70,523	$175,725	$220,300	186.60	4.50	9.56	10.67
Company C	$650,000	$33,650,000	$85,895	$192,790	$191,475	174.54	3.37	11.45	7.57
Company D	$540,000	$20,540,000	$81,775	$161,280	$150,086	127.36	3.35	10.20	6.60
Minimum						127.36	3.35	9.56	6.60
Maximum						207.69	5.72	11.45	10.67
Mean						174.05	4.23	10.64	8.35
Median						180.57	3.93	10.78	8.06

 

Compac's Historical Financial Ratios

Financial ratios	Years
	2019	2020	2021	2022
Solvency Ratios
Debt ratio	0.61	0.61	0.65	0.67
Debt-to-equity ratio	1.18	1.59	1.61	1.79
Interest coverage ratio	22.5	3.67	6.36	29.72
Liquidity Ratios
Current Ratio	1.56	1.34	1.24	1.54
Quick Ratio	1.06	0.91	0.94	0.87
Cash Ratio	0.17	0.16	0.23	0.13
Profitability Ratios
Profit margin	1.90%	1.50%	1.90%	3.70%
ROE (Return on equity), after tax	9.50%	5.40%	8.50%	12.40%
ROA (Return on assets)	4.20%	2.30%	2.70%	2.90%
Gross margin	10.50%	16.90%	24%	19.50%
Operating margin (Return on sales)	2.90%	2.10%	2.60%	4.70%
Activity Ratios
Asset turnover (days)	166	188	207	206
Receivables turnover (days)	62	63	61	74
Inventory turnover (days)	28	37	40	33
Price Ratios
Dividend Payout Ratio	0.14	0.37	0.2	0.3

 

Industry Financial Ratios 

Financial ratios			Year
			2023
Solvency Ratios
Debt ratio			0.68
Debt-to-equity ratio			2.1
Interest coverage ratio			6.3
Liquidity Ratios
Current Ratio			1.56
Quick Ratio			0.97
Cash Ratio			0.23
Profitability Ratios
Profit margin			0.021
ROE (Return on equity), after tax			0.099
ROA (Return on assets)			0.031
Gross margin			0.131
Operating margin (Return on sales)			0.065
Activity Ratios
Asset turnover (days)			212
Receivables turnover (days)			90
Inventory turnover (days)			35
Price Ratios
Dividend Payout Ratio			0.35

 

Compac, Inc. Statements of Earnings (in 000)

	2028	2027	2026	2025	2024	2023
Net Revenues	147000	$       123,500	$     118,000	$       55,400	$       40,100	$       18,200
Total Cost of Goods Sold	42000	21,500	10,550	8,500	5,750	5,500
Gross Profit	105,000	102,000	107,450	46,900	34,350	12,700
Operating Expense	3,900	3,200	2,100	1,700	1,500	1,200
Other Operating Expense	2,300	1,100	1,250	1,100	450	350
Sales, General & Administrative expense	4,100	3,950	3,275	2,750	2,250	2,200
Earnings Before Interest, Tax and Depreciation	94,700	93,750	100,825	41,350	30,150	8,950
Depreciation Expense	3,200	2,870	2,370	2,100	1,750	1,200
Interest  Expense	2,619	2,231	1,525	731	506	750
Earnings Before Tax	88,881	88,649	96,930	38,519	27,894	7,000
Tax Expense @ 21%	18,665	18,616	20,355	8,089	5,858	1,470
Net Income	70,216	70,033	76,575	30,430	22,036	5,530
Common Dividend	29000	27000	24000	15500	12570	0
Preferred Dividend	365	355	305	255	105	0
Add to  Retained Earnings	40,851	42,678	52,270	14,675	9,361	5,530

 

 

Compac, Inc. Balance Sheets (in 000)

Assets	2028	2027	2026	2025	2024	2023
Current Assets
Cash	18,383	33,143	16,975	(6,405)	(7,470)	80
Account Receivables	27,000	25,800	22,000	12,550	9,000	5,800
Inventories	54,912	33,401	22,781	7,721	4,361	3,500
Other Current Assets	13,500	11,900	8,550	5,500	3,500	3,000
Total Current Assets	113,795	$        104,244	$          70,306	$          19,366	$     9,391	$   12,380
Property & Equipment, Gross	28,500	18,500	15,400	13,500	8,500	4,500
Accumulated Depreciation	-13,490	(10,290)	(7,420)	(5,050)	(2,950)	(1,200)
Property & Equipment, Net	15,010	8,210	7,980	8,450	5,550	3,300
Goodwill	75,000	62,500	42,500	28,000	20,500	13,800
Other Intangible Assets	18,500	15,550	12,600	8,000	5,000	4,100
Total Assets	222,305	$        190,504	$        133,386	$          63,816	$  40,441	$   33,580
Liabilities & Stockholders' Equity
Current Liabilities
Accounts Payable	8,600	7,240	5,100	2,500	900	3,050
Current Portion of Long-Term Debt	2,900	2,200	1,900	500	100	-
Total Current Liabilities	11,500	$            9,440	$            7,000	$            3,000	$     1,000	$     3,050
Long-Term Debt	39,000	33,500	22,500	11,200	8,000	12,000
Total Liabilities	50,500	$          42,940	$          29,500	$          14,200	$     9,000	$   15,050
Stockholders' Equity
Common Stock	2,790	19,500	19,000	17,500	15,500	13,000
Preferred Stock	3,650	3,550	3,050	2,550	1,050	-
Retained Earnings	165,365	124,514	81,836	29,566	14,891	5,530
Total Liabilities & Stockholders' Equity	222,305	$        190,504	$        133,386	$          63,816	$  40,441	$   33,580