I

Consider the following startup company which produces a mobile device. The company needs to purchase two types of inputs. The costs of input A account for 30% of sales and the costs of input B account for 20% of sales. In addition, the following assumptions are made and hold for all subsequent questions. The company sells one million units of the device at t = 1 and X units at t = 2. The company sells the device for $10 per unit at t = 1 and t = 2. The company only exists for two period (t = 1, 2) and the liquidation (residual) value is zero. There is no CAPEX, no depreciation and no changes in working capital. The tax rate is 30%. The cost of capital (i.e. discount rate) is 25%. (a) Suppose X = 2 million units at t = 2. Determine the operating income (EBIT), net operating income and free cash flow of the company at t = 1 and t = 2? (b) The owner wants to sell the company and hires an investment bank to do a DCF valuation. What is the (DCF-) value of the firm for the seller? A private equity fund is interested in acquiring this company at t = 0. The owner of the company asks for $8 million. The acquisition price of $8 million (for the startup and its plant properties and equipment) is paid in cash and fully written off in two years in equal amount (linear depreciation). The cost of capital is 25%. (c) Does the private equity fund buy the company for that price? (d) The private equity fund conducts a sensitivity analysis. Determine the minimum units X sold at t = 2 so that the private equity fund breaks even at that acquisition price