ITE Valuation Excel Valuations Introduction Recall William's assumptions: With the right financing and the right acquisitions, under ideal circumstances, ITE could achieve $6 million in sales in five years, and $14 million in 10 years, with a target 20% growth rate,William said. He realized this was an ambitious goal, given that the industry was only growing at 2.4%. He estimated that plant, property and equipment would average 15-20% of sales to support this level of growth. William said that while some of the income statement and balance sheet accounts varied in recent years, he thought it was a fair approximation to use averages of the accounts as a percent of sales over the past three years. Overall, he thought that the past statements were reflective of the future. Growth would be much more modest after 10 years, with sales growing at the rate of inflation and low maintenance capital expenditure equaling low depreciation expenses. William had found statistics about small companies that were in the same line of business as ITE. These are compiled in ITE Case Exhibits (available in the course space). See Exhibit 1 for comparable transaction information and Exhibit 2 for selected ITE financial information. Exhibit 3 contains information about ITE competitors and Exhibit 4 has financial markets information. Now William had to find a way to set an asking price for ITE so he could decide whether to put the firm on the market, get himself out from under the frustrating burden of partnership, or buy out Johns share of the firm. ________________________________________ Deliverable Instructions Use the ITE Case Exhibits excel file above to calculate the following. Add tabs to the spreadsheet for each of the following tasks. Value ITE using discounted cash flow. a. Calculate WACC. Find cost of equity using beta information in Exhibit 3 and market data in Exhibit 4. b. Create forecasted free cash flows for ITE using information in Exhibit 2 c. Find the value of ITE using free cash flow discounted by WACC, and using a growing perpetuity to calculate terminal value. Value ITE using comparable transactions in Exhibit 1. Exhibit 2 - ITE Financial Statement Information

Exhibit 2 - ITE Financial Statement Information
Income Statement Information
	2011	2012	2013
Total Revenue	1,358,013	2,185,370	2,789,920
Cost of Goods Sold	322,862	379,726	591,497
Direct Costs	226,525	439,816	685,430
Gross Profit	808,626	1,365,828	1,512,993
Indirect Costs	591,723	840,130	1,313,781
Operating Income	216,903	525,698	199,212
Other Expenses	54,606	62,220	137,779
Other Income	10,750	3,792	736
Net Income	173,047	467,270	62,169
Balance Sheet Information
	2011	2012	2013
Assets
Current Assets	392,443	681,510	387,963
Computers/Furniture/Vehicles	91,502	137,613	151,604
Depreciation Comp/Furn/Vehicles	(38,811)	(59,020)	(87,420)
Leashold Equipment	-	2,575	14,690
Goodwill on Acquisitions	70,000	1,610,614	1,560,953
Other Assets	3,668	1,711	1,205
Total Assets	518,802	2,375,003	2,028,995
Liabilities
Current Liabilities	73,589	215,465	83,786
Bank Loans	20,604	542,349	517,705
Partner Loans	-	14,651	114,569
Non-owner Notes	-	183,729	684,140
Total Liabilities	94,193	956,195	1,400,201
Equity	424,610	1,418,809	628,794
Total Liabilities and Equity	518,802	2,375,003	2,028,995

Exhibit 1 - Recent Transactions in the Information Technology Services Industry

Source: Pratt's Stats

Sales

MVIC to Net Income

MVIC to Sales

MVIC to Gross Profit

MVIC to EBIT

MVIC to Book Value

of Invested Capital

Under $1,000,000

0.16

0.71

1.02

12.47

15.65

$1,000,000-$5,000,000

0.11

1.35

1.92

5.48

6.23

$5,000,001-$20,000,000

-0.36

2.31

4.99

18.91

4.06

$20,000,001-$50,000,000

-0.06

0.64

1.78

7.4

1.07

$50,000,001-$100,000,000

0.02

1.12

6.78

22.46

11.84

Over $100,000,000

0.073

0.64

2.19

6.42

3.4

All Companies

0.008

1.24

2.41

18.37

7.84

Financial Market Information

Risk free rate

3.85%

Equity risk premium

6.00%

Small company risk premium

10.00%

Cost of high yield debt

12.00%

L.T. US Treasury Bond Yield (20 year)

3.00%

L.T. historical expected equity risk premium: Large company stock total returns minus L. T. government bond income returns

6.50%

L.T. supply side expected equity risk premium: Historical equity risk premium minus price to equity ratio calculated using 3-year average returns

7.50%

Source: Ibbotson and Associate, Stocks, Bonds, Bills

Exhibit 5 - Competitors Data
Kratos Defense and Security Solutions
in millions	2007	2008	2009
Revenues	193.6	297.3	334.5
EBIT	-26.9	-106.3	-37.3
Net Income	-40.8	-111.1	-41.5
Price (December)	23.5	14	10.55
Number of Shares	7.42	10.53	15.78
Depreciation	4.3	7.3	8.3
Book Value Equity	167.2	146.9	124.9
Long Term Debt	74	76.9	51.6
Current Assets	106.9	116.2	98.8
Accounts Receivable	80.6	101.2	79.6
Current Liabilties	83.5	81.2	61.7
Net Fixed Assets	6.9	7.2	4.3
Dividend	0	0	0
Beta			1.18
Hackett Group
in millions	2007	2008	2009
Revenues	177.01	192.1	142.7
EBIT	9.27	18.34	-7.02
Net Income	9	17.88	-6.81
Price (December)	4.84	2.92	2.78
Number of shares	43.63	39.49	38.14
Depreciation	2.09	2.05	1.86
Book Value Equity	98.82	93.92	98.25
Long Term Debt	0	0	0
Current Assets	58.41	62.29	46.34
Accounts Receivable	29.74	25.48	28.65
Current Liabilties	33.02	37.99	34.91
Net Fixed Assets	5.71	5.77	7.14
Dividend	0	0	0
Beta			0.8
RCM Technologies
in millions	2007	2008	2009
Revenues	214.21	209.28	189.39
EBIT	11.05	-44.36	11.11
Net Income	6.77	-39.81	6.92
Price (December)	5.88	1.11	2.51
Number of Shares	12.06	12.77	12.96
Depreciation	1.45	2.06	1.62
Book Value Equity	92.05	55.35	63.3
Long Term Debt	0	0	0
Current Assets	61.21	66.18	60.68
Accounts Receivable	47.36	55.77	46.35
Current Liabilties	17.67	23.49	14.01
Net Fixed Assets	4.23	5.59	4.77
Dividend	0	0	0
Beta			0.5
Sword Group
in millions	2007	2008	2009
Revenues	263.54	289.98	258.84
EBIT	42.16	44.23	42.54
Net Income	27.84	30.08	31.58
Price (December)	50.93	13.88	35.13
Number of shares	9.29	9.29	9.29
Depreciation	2.86	3.43	2.81
Book Value Equity	218.07	175.13	212.26
Long Term Debt	0	0	0
Current Assets	164.61	165.81	197.6
Accounts Receivable	0	0	0
Current Liabilties	116.51	111.32	116.14
Net Fixed Assets	9.23	8.95	7.98
Dividend (per share)	0	0.75	0.86
Beta			0.68

and Inflation 2009 Yearbook