In 2005, your investment company has offered to buy Ideko for $52.3 million. Using the APV method, estimate the value of Ideko and the NPV of the deal using the continuation value shown here . The estimated unlevered cost of capital is 12.30%. Assume that the debt cost of capital is 6.9%; Ideko's market share will increase by 0.65% per year until 2010; investment, financing, and depreciation will be adjusted accordingly; and the projected improvements in working capital occur (i.e., Ideko's working capital requirements through 2010 will be as shown here 1). Ideko's projected free cash flows are shown here (the projected free cash flow for 2011 is $16,527,000). Ideko's projected income statements and balance sheets are shown here and here respectively. Assume an income tax rate of 35%. The projected dividend payments for 2006 thru 2010 are shown here: Calculate the value of Ideko using the APV method below (Notice that we begin with year 2010 and work backward to year 2005.): (Round to the nearest $ 000.) APV Method ($ 000) 2010 Free Cash Flow of Firm Unlevered Value of the Firm Interest Tax Shield Tax Shield Value APV Ille Debt Equity Value Continuation Value: Multiples Approach ($ 000) EBITDA in 2010 29,245 Common Multiples 9.1 x EV/Sales 1.8 x EBITDA Multiple Continuation Enterprise Value 266,130 15.0 x P/E (levered) P/E (unlevered) Debt (115,000) 18.3 x Continuation Equity Value 151,130 (Click on the following icon in order to copy its contents into a spreadsheet.) > 2005 Ideko's Working Capital Requirements Working Capital Days Assets Based on: Accounts Receivable Sales Revenue Raw Materials Raw Materials Costs Finished Goods Raw Materials + Labor Costs Minimum Cash Balance Sales Revenue Liabilities Wages Payable Direct Labor + Admin Costs Other Accounts Payable Raw Materials + Sales and Marketing 2005 Days 90 45 45 30 Days 60 30 45 30 15 15 45 45 Working Capital ($ 000) 2005 2006 2007 2008 2009 2010 Assets Accounts Receivable 17,803 14,856 16,847 19,044 21,466 24,133 Raw Materials 2,034 1,604 1,805 2,026 2,267 2,529 Finished Goods 4,204 5,131 5,859 6,671 7,574 8,579 Minimum Cash Balance 5,934 7,428 8,423 9,522 10,733 12,067 Total Current Assets 29,975 29,019 32,934 37,263 42,040 47,308 Labilities Wages Payable 1,286 1,463 1,679 1,873 2,085 2,375 Other Accounts Payable 3,422 4,234 4,965 5,797 6,581 7,371 Total Current Liabilities 4,708 5,697 6,644 7,670 8,666 9,746 Net Working Capital 25,267 23,322 26,290 29,593 33,374 37,562 Increase in Net Working Capital (1,945) 2,968 3,303 3,781 4,188 2005 2006 2007 2008 2009 2010 Free Cash Flow ($ 000) Net Income Plus: After-tax Interest Expense 5,177 5,822 7,088 9,223 10,050 4,463 4,463 4,463 4,463 4,463 Unlevered Net Income 9,640 10,285 11,551 13,686 14,513 Plus: Depreciation 5,611 5,540 5,476 5,418 Less: Increase in NWC 1,945 (2,968) (4,900) (3,303) (4,900) (3,781) (4,900) Less: Capital Expenditures (4,900) 6,917 (4,188) (20,400) (3,158) 15,500 (4,463) Free Cash Flow of Firm 12,296 7,957 8,824 10,423 Plus: Net Borrowing Less: After-tax Interest Expense (4,463) (4,463) (4,463) (4,463) Free Cash Flow to Equity 7,833 3,494 4,361 5,960 7,879 2005 2006 2007 2008 2009 2010 Income Statement ($ 000) Sales 72,200 90,372 102,484 115,849 130,582 146,810 Cost of Goods Sold Raw Materials (16,500) (19,513) (17,600) (22,104) (21,966) (25,560) (24,647) (29,459) (27,577) (33,858) (30,775) (38,812) Direct Labor Costs Gross Profit 38,100 48,755 54,958 61,743 69,147 77,223 Sales and Marketing (11,260) (14,830) (13,700) (13,484) (18,304) (15,291) (22,370) (16,126) (25,803) (16,871) (29,010) (18,968) Administrative EBITDA 13,140 20,441 23,247 26,473 29,245 21,363 (5,540) Depreciation (5,690) (5,611) (5,476) (5,418) (6,917) EBIT 7,450 14,830 15,823 17,771 21,055 22,328 Interest Expense (net) (78) (6,866) (6,866) (6,866) (6,866) (6,866) Pretax Income 7,372 7,964 8,957 10,905 14,189 15,462 Income Tax (2,580) (2,787) (3,135) (5,412) (3,817) (4,966) 7,088 9,223 Net Income 4,792 5,177 5,822 10,050 Balance Sheet ($ 000) 2005 2006 2007 2008 2009 2010 5,934 7,428 8,423 9,522 10,733 12,067 17,803 14,856 16,847 19,044 21,466 24,133 Assets Cash and Equivalents Accounts Receivable Inventories Total Current Assets Property, Plant and Equipment Goodwill 6,238 6,735 7,664 8,697 9,841 11,108 29,975 29,019 32,934 37,263 42,040 47,308 51,210 50,499 49,859 49,283 48,765 62,248 72,321 72,321 72,321 72,321 72,321 72,321 Total Assets 153,506 151,839 155,114 158,867 163,126 181,877 Liabilities and Stockholders' Equity Accounts Payable 4,708 5,697 6,644 7,670 8,666 9,746 Debt 99,500 99,500 99,500 99,500 99,500 115,000 Total Liabilities 104,208 105,197 106,144 107,170 108,166 124,746 Stockholders' Equity Starting Stockholders' Equity 49,298 46,642 48,970 51,697 54,960 aan cara Net Income 5,177 5,822 7,088 9,223 10,050 Dividends (7,833) (3,494) (4,361) (5,960) (7,879) Capital Contributions Total Stockholders' Equity 49,298 46,642 48,970 51,697 54,960 57,131 Total Liabilities and Equity 153,506 151,839 155,114 158,867 163,126 181,877 (Click on the following icon in order to copy its contents into a spreadsheet.) Dividends ($ 000) 2006 (7,833) 2007 (3,494) 2008 (4,361) 2009 (5,960) 2010 (7,879) In 2005, your investment company has offered to buy Ideko for $52.3 million. Using the APV method, estimate the value of Ideko and the NPV of the deal using the continuation value shown here . The estimated unlevered cost of capital is 12.30%. Assume that the debt cost of capital is 6.9%; Ideko's market share will increase by 0.65% per year until 2010; investment, financing, and depreciation will be adjusted accordingly; and the projected improvements in working capital occur (i.e., Ideko's working capital requirements through 2010 will be as shown here 1). Ideko's projected free cash flows are shown here (the projected free cash flow for 2011 is $16,527,000). Ideko's projected income statements and balance sheets are shown here and here respectively. Assume an income tax rate of 35%. The projected dividend payments for 2006 thru 2010 are shown here: Calculate the value of Ideko using the APV method below (Notice that we begin with year 2010 and work backward to year 2005.): (Round to the nearest $ 000.) APV Method ($ 000) 2010 Free Cash Flow of Firm Unlevered Value of the Firm Interest Tax Shield Tax Shield Value APV Ille Debt Equity Value Continuation Value: Multiples Approach ($ 000) EBITDA in 2010 29,245 Common Multiples 9.1 x EV/Sales 1.8 x EBITDA Multiple Continuation Enterprise Value 266,130 15.0 x P/E (levered) P/E (unlevered) Debt (115,000) 18.3 x Continuation Equity Value 151,130 (Click on the following icon in order to copy its contents into a spreadsheet.) > 2005 Ideko's Working Capital Requirements Working Capital Days Assets Based on: Accounts Receivable Sales Revenue Raw Materials Raw Materials Costs Finished Goods Raw Materials + Labor Costs Minimum Cash Balance Sales Revenue Liabilities Wages Payable Direct Labor + Admin Costs Other Accounts Payable Raw Materials + Sales and Marketing 2005 Days 90 45 45 30 Days 60 30 45 30 15 15 45 45 Working Capital ($ 000) 2005 2006 2007 2008 2009 2010 Assets Accounts Receivable 17,803 14,856 16,847 19,044 21,466 24,133 Raw Materials 2,034 1,604 1,805 2,026 2,267 2,529 Finished Goods 4,204 5,131 5,859 6,671 7,574 8,579 Minimum Cash Balance 5,934 7,428 8,423 9,522 10,733 12,067 Total Current Assets 29,975 29,019 32,934 37,263 42,040 47,308 Labilities Wages Payable 1,286 1,463 1,679 1,873 2,085 2,375 Other Accounts Payable 3,422 4,234 4,965 5,797 6,581 7,371 Total Current Liabilities 4,708 5,697 6,644 7,670 8,666 9,746 Net Working Capital 25,267 23,322 26,290 29,593 33,374 37,562 Increase in Net Working Capital (1,945) 2,968 3,303 3,781 4,188 2005 2006 2007 2008 2009 2010 Free Cash Flow ($ 000) Net Income Plus: After-tax Interest Expense 5,177 5,822 7,088 9,223 10,050 4,463 4,463 4,463 4,463 4,463 Unlevered Net Income 9,640 10,285 11,551 13,686 14,513 Plus: Depreciation 5,611 5,540 5,476 5,418 Less: Increase in NWC 1,945 (2,968) (4,900) (3,303) (4,900) (3,781) (4,900) Less: Capital Expenditures (4,900) 6,917 (4,188) (20,400) (3,158) 15,500 (4,463) Free Cash Flow of Firm 12,296 7,957 8,824 10,423 Plus: Net Borrowing Less: After-tax Interest Expense (4,463) (4,463) (4,463) (4,463) Free Cash Flow to Equity 7,833 3,494 4,361 5,960 7,879 2005 2006 2007 2008 2009 2010 Income Statement ($ 000) Sales 72,200 90,372 102,484 115,849 130,582 146,810 Cost of Goods Sold Raw Materials (16,500) (19,513) (17,600) (22,104) (21,966) (25,560) (24,647) (29,459) (27,577) (33,858) (30,775) (38,812) Direct Labor Costs Gross Profit 38,100 48,755 54,958 61,743 69,147 77,223 Sales and Marketing (11,260) (14,830) (13,700) (13,484) (18,304) (15,291) (22,370) (16,126) (25,803) (16,871) (29,010) (18,968) Administrative EBITDA 13,140 20,441 23,247 26,473 29,245 21,363 (5,540) Depreciation (5,690) (5,611) (5,476) (5,418) (6,917) EBIT 7,450 14,830 15,823 17,771 21,055 22,328 Interest Expense (net) (78) (6,866) (6,866) (6,866) (6,866) (6,866) Pretax Income 7,372 7,964 8,957 10,905 14,189 15,462 Income Tax (2,580) (2,787) (3,135) (5,412) (3,817) (4,966) 7,088 9,223 Net Income 4,792 5,177 5,822 10,050 Balance Sheet ($ 000) 2005 2006 2007 2008 2009 2010 5,934 7,428 8,423 9,522 10,733 12,067 17,803 14,856 16,847 19,044 21,466 24,133 Assets Cash and Equivalents Accounts Receivable Inventories Total Current Assets Property, Plant and Equipment Goodwill 6,238 6,735 7,664 8,697 9,841 11,108 29,975 29,019 32,934 37,263 42,040 47,308 51,210 50,499 49,859 49,283 48,765 62,248 72,321 72,321 72,321 72,321 72,321 72,321 Total Assets 153,506 151,839 155,114 158,867 163,126 181,877 Liabilities and Stockholders' Equity Accounts Payable 4,708 5,697 6,644 7,670 8,666 9,746 Debt 99,500 99,500 99,500 99,500 99,500 115,000 Total Liabilities 104,208 105,197 106,144 107,170 108,166 124,746 Stockholders' Equity Starting Stockholders' Equity 49,298 46,642 48,970 51,697 54,960 aan cara Net Income 5,177 5,822 7,088 9,223 10,050 Dividends (7,833) (3,494) (4,361) (5,960) (7,879) Capital Contributions Total Stockholders' Equity 49,298 46,642 48,970 51,697 54,960 57,131 Total Liabilities and Equity 153,506 151,839 155,114 158,867 163,126 181,877 (Click on the following icon in order to copy its contents into a spreadsheet.) Dividends ($ 000) 2006 (7,833) 2007 (3,494) 2008 (4,361) 2009 (5,960) 2010 (7,879)