Max founded Hair Beat, which provides overnight organic hydrating hair masks, over several years ago. He invested $2,100,000 of his own funds in Hair Beat at the end of 2015 and now owns 70% of the venture. Max and the investors have decided to harvest the investment at the end of 2019. Icon Beauty Inc. is considering acquiring Hair Beat and they are provided with the following Projected Income Statements for years 2020, 2021, and 2022. A. Calculate the enterprise value of Hair Beat as of the end of 2022 using Relative Valuation Method. How much would Icon Beauty Inc. be willing to pay for Hair Beat at the end of 2019? (6 marks) Income Statements 2019 2020 2021 2022 Sales 22,000,000 30,800,000 28,600,000 26,400,000 B. Max also contemplates on exiting the venture by going public. From the perspective of an entrepreneur, what are the advantages of an outright sale over an IPO? (4 marks) Cost of goods sold (11,000,000) (15,400,000) (14,300,000) (13,200,000) Gross profit 11,000,000 15,400,000 14,300,000 13,200,000 Operating expenses (7,000,000) (9,800,000) (9,100,000) (8,400,000) EBITDA 4,000,000 5,600,000 5,200,000 4,800,000 Depreciation (450,000) (540,000) (648,000) (777,600) EBIT 3,550,000 5,060,000 4,552,000 4,022,400 Interest (120,000) (264,000) (306,000) (340,800) EBT 3,430,000 4,796,000 4,246,000 3,681,600 Taxes (30%) (1,029,000) (1,438,800) (1,273,800) (1,104,480) Net income 4,459,000 6,234,800 5,519,800 4,786,080 Icon Beauty Inc. has examined other comparable firms in the industry and believes that Secret Strands and Hyper Mask are the two closest competitors. Secret Strands has an Enterprise Value of $64,800,000 and EBITDA of $16,200,000 in most recent year. Hyper Mask has an Enterprise Value of $47,400,000 and EBITDA of $7,900,000 in most recent year. Icon Beauty believes using the average Enterprise Value to EBITDA ratios of the 2 competitors would be appropriate to determine Hair Beat's value. Discount rate is 30%. Max founded Hair Beat, which provides overnight organic hydrating hair masks, over several years ago. He invested $2,100,000 of his own funds in Hair Beat at the end of 2015 and now owns 70% of the venture. Max and the investors have decided to harvest the investment at the end of 2019. Icon Beauty Inc. is considering acquiring Hair Beat and they are provided with the following Projected Income Statements for years 2020, 2021, and 2022. A. Calculate the enterprise value of Hair Beat as of the end of 2022 using Relative Valuation Method. How much would Icon Beauty Inc. be willing to pay for Hair Beat at the end of 2019? (6 marks) Income Statements 2019 2020 2021 2022 Sales 22,000,000 30,800,000 28,600,000 26,400,000 B. Max also contemplates on exiting the venture by going public. From the perspective of an entrepreneur, what are the advantages of an outright sale over an IPO? (4 marks) Cost of goods sold (11,000,000) (15,400,000) (14,300,000) (13,200,000) Gross profit 11,000,000 15,400,000 14,300,000 13,200,000 Operating expenses (7,000,000) (9,800,000) (9,100,000) (8,400,000) EBITDA 4,000,000 5,600,000 5,200,000 4,800,000 Depreciation (450,000) (540,000) (648,000) (777,600) EBIT 3,550,000 5,060,000 4,552,000 4,022,400 Interest (120,000) (264,000) (306,000) (340,800) EBT 3,430,000 4,796,000 4,246,000 3,681,600 Taxes (30%) (1,029,000) (1,438,800) (1,273,800) (1,104,480) Net income 4,459,000 6,234,800 5,519,800 4,786,080 Icon Beauty Inc. has examined other comparable firms in the industry and believes that Secret Strands and Hyper Mask are the two closest competitors. Secret Strands has an Enterprise Value of $64,800,000 and EBITDA of $16,200,000 in most recent year. Hyper Mask has an Enterprise Value of $47,400,000 and EBITDA of $7,900,000 in most recent year. Icon Beauty believes using the average Enterprise Value to EBITDA ratios of the 2 competitors would be appropriate to determine Hair Beat's value. Discount rate is 30%
