Karla Stevens, Head of Marketing at Frankfurt Industries, was confident in her intuition that launching a new product offering would be extremely well received by Frankfurt's existing client base and would generate additional value for Frankfurt's shareholders. She had identified a potential stand-alone acquisition that had recently come available and was being shown to prospective strategic buyers at an indicative Enterprise Value of $300 million. Karla had a preliminary meeting with the CFO of the company to get buy-in. However, that meeting did not result in the outcome she had hoped for. While the CFO could broadly understand her perspective, and appreciated her expertise, Karla was not able to lay a clear business case to move forward, as she ultimately realized that it all comes down to a financial and risk analysis.

You are a Financial Analyst working for Karla at Frankfurt Industries. After returning from her meeting with the CFO, Karla asks you to come to her office.Not knowing what this was all about, but grateful for the opportunity to demonstrate your financial acumen, you headed off to her office.

Karla explains the background of what she was trying to do and shared with you her financial base line assumptions. She also passed on to you some key information she had learned from her meeting with the CFO.

Your job Karla explained was to take the relevant information and put together an analysis that would show the value proposition of the potential target.

Eager to get started, you look at all the input you have been given. While a lot of the base line assumptions are there, there were several key assumptions that needed to be made so that you could accurately and confidently project out cash flow. Karla expressed her confidence in you and encouraged you to develop your own set of assumptions, the only caveat being that you needed to be able to defend them.

The needed analysis was to develop a discounted cash flow analysis and determined the enterprise value of the project.That analysis would serve as a reference point as relates to whether to move forward with the potential acquisition.

Specific Assignment

Construct a DCF analysis and determine the Enterprise Value using the information outlined below. Forecast out five years of projections before using the Gordon Growth method to calculate Terminal Value.

• Revenues
  • Current Year: $ 95,000
  • Projected Year 1: $100,000
  • Projected Year 2: $105,000
  • Projected Year 3: $110,000
  • Projected Year 4: $115,000
  • Projected Year 5: $120,000
  • Long-term industry growth rate of 3%
• Gross Margins forecasted at 38%
• Depreciation at 8% of Revenues
• Capital Expenditures of 9% of Revenues
• Operating Margins forecasted at 16%
• Tax Rate of 25%
• DSO, DIO, and DPO of 30, 60, and 30 days respectively
• Prepaids running 2% of revenues and Accruals running 3% of revenues.
• Target Capital Structure of 35% Debt and 65% Equity
• Company pays 5% for its debt.
• Risk free rate of 2%, beta of 1.2 and market risk premium of 6%
• Use a 360-day year.