MBA 830

UNIT 3 CASE STUDY

The owner of a private firm has requested that you estimate the value of the firm so that it can be marketed for sale. The firm creates custom, made-to-order furniture. The firm's most recent results are shown in Appendix A.

Management expects revenues, cost of goods sold, operating expenses, depreciation (and amortization), and capital expenditures to grow 20% annually for the next five years with taxes remaining at 40% for each year. Balance sheet items in the most recent year include $10 million of outstanding, interest-bearing debt and $10 million book value of equity. The outstanding debt is expected to remain constant for this analysis, and management anticipates no changes in working capital. Free cash flows are estimated to grow at 5% after the five year period.

Industry averages for market value of equity are three times book value, for beta are 1.30, and for market debt ratio are 20%. Average market multiple for the industry is 7 times net income, and the Treasury bond rate is assumed to be 7%.

Based on this information and the information covered in Unit 3, make a DCF and Market Multiple analysis (in Excel) to help the owner estimate firm value. Please make sure to include your calculations for the following items:

Annual Free Cash Flows

Cost of debt

Cost of equity

WACC

Terminal Value

Firm Value, Debt Value, and Equity Value

Would the owner prefer the DCF or Market Multiple approach to valuation? Why?

MBA 830

Unit 3 Case Study

Appendix A

Furniture CompanyIncome & FCF Analysis($ in thousands)MostRecentYearRevenue20,000$ Cost of Goods Sold15,500 Gross Profit Margin4,500 Gross Profit Margin %22.5%General Operating Expenses2,000 Depreciation & Amortization500 Total Operating Expenses2,500 Interest Expenses1,000 Income before Taxes1,000 Taxes400 Tax Rate40.0%Net Income600$ Add: After Tax Interest Expense600$ Less: Capital Expenditures(1,000) Add: Depreciation500 Add: Decrease (Increase) in AR- Add: Decrease (Increase) in Inv- Add: Increase (Decrease) in AP- Unlevered Free Cash Flows700$