In this question, you are hired by Palumbo & Entrup Partners (PE) to decide whether it is worthwhile to purchase a private firm, Young LLC. Young LLC produces a type of communicating watch with its own apps. The following table shows the financial information for Young LLC. 2021 Income Statement and Balance Sheet Data for Young LLC. Year 2021 Year 2021 Income Statement ($ 000) Balance Sheet ($ 000) 1 Sales 20,000 Assets 1 Cash and Equivalents 2 Accounts Receivable 3 Inventories 2 Cost of Goods Sold (3,000) (2,400) 14,600 11,000 4,000 5,000 3 Raw Materials 4 Direct Labor Costs 5 Gross Profit 6 Sales and Marketing 7 Administrative 8 EBITDA 4 Total Current Assets 20,000 10,000 5 Property, Plant, and Equipment 6 Goodwill 1 Total Assets| Liabilities and Stockholder's Equity 8 Accounts Payable 9 Debt 10 Total Liabilities 11 Stockholder's Equity 12 Total Liabilities and Equity (2,600) (3,800) --- 8,200 30,000 (1,000) 7,200 11 Interest Expense (net) (300) 9 Depreciation 10 EBIT 1,255 6,000 7,255 12 Pre-tax Income 6,900 13 Income Tax 14 Net Income (1,380) 5,520 22,745 30,000 Young LLC has excess cash of $10 million. Based on its business, the comparable companies are Microsoft Corporation (MSFT), Alphabet Inc. (GOOGL), and Apple Inc. (AAPL). The owner of Young is willing to accept a price based on the average of equity prices estimated using P/E, and Enterprise Value/EBITDA ratios for each of the comparable firm. Based on your analysis, what acquisition price will you propose to pay for the owner (the equity holder)? (Please use the ratios in the following table.) Valuation ratios of comparable firms Multiple AAPL MSFT GOOGL P/E 31.3 38.0 28.1 EV/EBITDA 24.4 27.8 18.9 Your manager wants to know how much money can PE make after buying the firm. You are given the following assumptions (if you need any other assumptions, please list them explicitly in your answer): 1. Market size for this type of watch is 1 million units in current year and is expected to grow at the rate of 10% per year in the coming five years; 2. Market share of Young is 20%. With some sales and marketing strategies, the market share can be increased by 300 basis points per year for the coming 5 years. That is, the market share next year will be 23%. 3. The average sales price is $100/unit in current year and is expected to grow at the rate of 5% per year. 4. The raw materials cost $15/unit in current year and is expected to grow at the rate of 7% in the coming 5 years. 5. The direct labor costs are $12/unit in current year and is expected to grow by 5% per year in the coming 5 years. 6. The sales and marketing costs account for 13% of the sales in current year. To increase the sales, PE plans to increase these costs to 16% in the next year and 18% in the year after next. After that, the costs will be 20% of the sales every year. 7. The administrative costs are 19% of sales in current year. PE plans to decrease them to 16% of sales in the next year, and 15% of sales from the year after next on. 8. The tax rate is 20% for all years. 9. The depreciation expense equals 10% of Property, Plant and Equipment of that year. 10. The Capital expenditure equals the depreciation cost. 11. Your manager wants you to use the discounted cash flow approach to estimate the continuation/terminal value. 12. To get the unlevered cost of equity, you are expected to estimate the levered beta of comparable firms using the stock return data of most recent 60 calendar months, calculate the unlevered beta assuming their debts are risk free, and take an average of the unlevered beta. (If you are not able to get the unlevered cost of equity, you can use 8% to continue the rest of the question.) To improve the operational efficiency, PE hopes to reach the following goals from the next year on: the accounts receivable will be 45 days of sales revenue, the raw materials will have 60 days of inventory, the finished goods will have 30 days of inventory; the minimum cash balance will be 20 days of sales. The wage payable will be 15 days of labor costs (including both the direct labor cost and administrative costs) and other account payable will be 60 days of raw materials and sales & marketing costs. To increase the firm value, PE wants to have an interest payment of $2.16 million in the coming 5 years. The interest rate for the safe debt is 3% per year. After five years, the acquired firm is expected to be sold at a price valued based on the perpetual free cash flows of the firm growing at 2% per year rate forever. (If you can't get the terminal value of the firm in five years, you can use $280 million as the terminal/end value to continue your work to get the credits for the rest of this problem.) PE will also return all the debt when selling the firm. Based on these assumptions, what is the NPV of acquiring Young LLC.?