MINICASE Wok Yow Imports, Inc. Wok Yow Imports, Inc., is a rapidly growing, closely held corporation that imports and sells Asian style furniture and accessories at several retail outlets. The equity owners are considering selling the venture and want to estimate the enterprise or entity value and then determine the value of the venture's equity. Following is last year's income statement (2013) and projected income statements for the next four years (2014-2017). Sales are expected to grow at an annual 6 percent rate beginning in 2018 and thereafter. ACTUAL PROJECTED [S THOUSANDS] 2013 2014 2015 2016 2017 $150.0 $300.0 -150.0 $350.0 -175.0 -75.0 75.0 150.0 175.0 $200.0 -100.0 100.0 -40.0 -10.0 50.0 Net sales Cost of goods sold Gross profit SG&A expenses Depreciation EBIT Interest Earnings before taxes Taxes (40% rate) Net income $250.0 -125.0 125.0 -50.0 -12.5 62.5 -30.0 -7.5 37.5 -3.5 -70.0 -17.5 87.5 -3.5 84.0 -33.6 -3.5 -60.0 -15.0 75.0 -3.5 71.5 -28.6 42.9 -3.5 34.0 -13.6 20.4 46.5 -18.6 27.9 59.0 -23.6 35.4 50.4 Selected balance sheet accounts at the end of 2013 are as follows: Required cash, accounts receivable, and inventory accounts totaled $50,000; net fixed assets were $50,000; and accounts payable and accruals totaled $25,000. Each of these accounts was expected to grow with sales over time. Long-term debt was $30,000, and there were 10,000 shares of common stock outstanding at the end of 2013. Data have been gathered for Fine Furniture Products, a comparable publicly traded firm in Wok Yow's industry. Fine Furniture's risk index is judged to be 2.00, compared to a risk index of 1.00 for firms of average riskiness. Management believes that a 2.00 adjustment factor should be multiplied times the expected market risk premium for average firms to reflect Wok Yow's (and Fine Furniture's) relatively greater riskiness. Wok Yow's long-term debt to long-term capital (long- term debt plus equity) ratio was 40 percent at the end of 2013. The interest rate on long-term U.S. government bonds is 7 percent, Wok Yow could issue new long-term debt at a 12 percent rate, and the average expected market risk premium (common stocks over government bonds) is 7.5 percent for average firms. A. Project Wok Yow's NOPAT statements for 2014 to 2018. B. Determine the annual increases in required net working capital and capital expenditures (CAPEX) for Wok Yow for the years 2014 to 2018 C. Project annual operating free cash flows to the entity for the years 2014 to 2018. D. Management initially thought that an 18 percent discount rate was reasonable. E. Use the information from Part D to estimate Wok Yow's terminal value cash flow at the end of 2017. F. Estimate the firm's enterprise or entity value at the end of 2013. G. Adjust the enterprise value to determine Wok Yow's equity value in dollars and on a per-share basis at the end of 2013 H. Now estimate Wok Yow's after-tax cost of long-term debt. Use the risk-free rate, the expected market risk premium, and the risk index for Fine Furniture Company to estimate Wok Yow's cost of equity capital. Determine Wok Yow's weighted average cost of capital (WACC). Reestimate Wok Yow's enterprise value using the WACC calculated in Part H. Then adjust the enterprise value to determine Wok Yow's equity value in dollars and on a per-share basis at the end of 2013 H I J K L 6.0% 16.7% B C D E F G 1 WOK YOW IMPORTS, INC. 2 Enterprise (Entity) Valuation Solution [Parts A through G): 3 Chapter 14 Mini Case Percent Change In Net Sales % of 33.3% 25.0% 20.0% 16.7% 5 (Thousands of Dollars) 2016 Actual Pro forma- 6 NOPAT Statements Sales 2016 2017 2018 2019 2020 7 Net Sales 100.0% 150.0 200.0 2500 300.0 350.0 8 Cost of Goods Sold 50.0% -75.0 -100.0 -1250 -150.0 -175.0 9 Gross Profit 50.0% 75.0 100.0 125.0 150.0 175.0 10 SG&A Expenses -20.0% -30.0 40.0 50.0 60.0 -70.0 11 Depreciation 5.0% -7.5 -10.0 12.5 15.0 17.5 12 EBIT 25.0% 37.5 50.0 62.5 75.0 87.5 13 Interest 0.0% 0.0 0.0 0.0 14 EBT 25.0% 50.0 62.5 75.0_ 87.5 15 Taxes (40% rate) -10.0% -20.0 25.0 30.0 35.0 16 NOPAT 15.0% 22.5 30.0 30.0 37.5 45.0 52.5 2021 371.0 -185.5 185.5 -74.2 18.6 92.8 Percent Change in Net Sales 33.3% 25.0% 20.0% Percent of Net Sales 2016 2017 2018 2019 100.0% 100.0% 100.0% 100.0% -50.0% -50.0% -50.0% -50.0% 50.0% 50.0% 50.0% 50.0% -20.0% 20.0% -20.0% 20.0% -5.0% 5.0% 5.0% 5.0% 25.0% 25.0% 25.0% 25.0% 0.0% 0.0% 0.0% 0.0% 25.0% 25.0% 25.0% 25.0% -10.0% -10.0% -10.0% 100% 15.0% 15.0% 15.0% 15.0% 2020 100.0% 50.0% 50.0% 20.0% 5.0% 25.0% 0.0% 25.0% -10.0% 15.0% 37.5 92.8 55.7 33.3% -16.7% 50.0 -25.0 25.0 83.3 41.7 41.7 8.3 100.0 50.0 50.0 8.3 116.7 58.3 58.3 8.3 123.7 61.8 61.8 3.5 33.3% 50.0 83.3 16.7 12.5 29.2 100.0 16.7 15.0 31.7 116.7 16.7 17.5 34.2 123.7 7.0 18.6 25.5 26.7 18 Required Net Working Capital: 19 Reg Cash+Receivables Inventories 20 Minus: Payables Accruals 21 Req Net Working Capital (RNWC) 22 Increase in RNWC 23 Fixed Assets Schedule: 24 Net Foxed Assets (NFA) 25 Increase in NFA 26 Plus: Depreciation 27 CAPEX 28 29 Free Cash Flows to Entity: 30 NOPAT 31 Plus: Depreciation 32 Minus: CAPEX 33 Minus: Increase in NWC 34 Operating Free Cash Flows 35 36 Terminal Value CF (r 18,9 -06) 37 Total Free Cash Flows (TFCF) 38 PV of TFCF (18% Discount Rate) 39 Less: LTD Value 40 Equity Value 41 Value Per Share (10,000 shares) 42 30.0 10.0 -26.7 -8.2 5.0 37.5 12.5 29.2 8.3 12.4 45.0 15.0 -31.7 8.3 20.0 52.5 17.5 34.2 8.3 27.5 55.7 18.6 -25.5 45.2 5.0 12.4 20.0 403.8 $233.6 $30.0 $203.6 $20.36 WOK YOW IMPORTS, INC. Enterprise (Entity) Valuation Solution Parts Hand 1]: 16.7% 6.0% 20.0% 16.75 Thousands of Dollars] NOPAT Statements Net Sales Cost of Goods Sold Gross Profit SG&A Expenses Depreciation EBIT Interest EBT Taxes (40% rate) NOPAT % of 2016 Sales 100.0% -50.0% 50.0% -20.0% 35.0% 25.0% 0.0% 25.0% -10.0% 15.0% Actual 2016 150.0 OU 75.0 -30.0 Percent Change in Net Sales 33.3% 25.0% 20.0% Pro forma 2017 2018 2019 200.0 2500 300.0 -100.0 125.0 150.0 100.0 125.0 150.0 40.0 -60. 0 6 0.0 0 1 2-5 -150 50.0 62.5 75.0 0.0 0.0 0.0 50.0 62.5 75.0 -20.0 -25.0 30.0 30.0 37.5 45.0 2020 380.0 175.0 1750 -70.0 175 87.6 0.0 87.5 35.0 52.5 2021 371.0 186.5 185.5 -74.2 -18.6 92.8 0.0 92.8 Percent Change in Net Sales 33.3% 25.0% Percent of Net Sales 2016 2017 2018 100.0% 100.0% 100.0% -50 0% 50.0% -50.0% 50.0% 50.0% 0.0% -20.0% 20.0% -20.0% -5.0% -5,0% -5,0% 25.0% 25.0% 25.0% 0.0% 0.0% 0.0% 25.0% 25.0% 25.0% -10.0% 100% -100% 15.0% 15.0% 2019 100.0% 0.0% 50.0% -20.0% -6.0% 25.0% 0.0% 25.0% -10.0% 15.0% 2020 100.0% 0.0% 50.0% 20.0% -6.0% 25 0% 0.0% 25.0% -100% 15.0% 37.5 0.0 37.5 22.5 15.0% 83.3 33.3% -16.7% 500 25.0 25.0 86.7 -33.3 33.3 41.7 8.3 100.0 -50.0 50.0 8.3 116.7 58.3 58. 3 8.3 123.7 61.8 61.8 3.5 8.3 85 Required Net Working Capital: Reg Cash+Receivables+Inventories Minus: Payables+Accruals Reg Net Working Capital (RNWC) Increase in RNWC Fixed Assets Schedule: Net Fixed Assets (NFA) Increase in NFA Plus: Depreciation CAPEX 33.3% 50.0 86.6 16.7 100 26.7 83.3 16.7 12.5 29.2 100.0 16.7 15.0 31.7 116.7 16.7 17.5 34.2 123.7 7.0 18.6 25.5 Fro. Cash Flows to Entity: NOPAT Plus: Depreciation Minus: CAPEX Minus: Increase in NWC Operating Free Cash Flows 30.0 10.0 -26.7 8.3 37.5 12.5 -29.2 12.4 8.2 45.0 15.0 -31.7 8.3 52.5 17.5 -34.2 8.3 27.5 55.7 18.6 25.5 -3.5 45.2 12.4 20.0 Terminal Value CF (r = .161.9 - .06) Total Free Cash Flows (TFCF) PV of TFCF (16.1% Discount Rate) Less: LTD Value Equity Value Value Per Share (10,000 shares) $270.1 $30.0 $240.1 $24.01 Cost of Capital Workshoot: "Comparable Firm Risk Index Cost of Equity Capital A-T Cost of LTD Capital WACC 2.00 0.220 0.072 0.161 Using the provided financial statements as a starting point: 1. The DCF valuation and pro forma financials with five years of forecasted growth rates are provided in the original model. Please modify the model to consider a more successful scenario where Wok Yow's sales grow at a more aggressive pace of 40% for five years and then flatten to a more sustainable growth rate of 7%. What would the stock value per share be under the new scenario? What kind of strategic changes you would make in the business model to justify the growth assumption? How would you do things differently? You can use fictional events to justify your assumptions. 2. Prepare and present DCF valuations and pro forma financial statements (five-year explicit period) that justify a $31 and a $56 share price. You can play with the model assumptions to get to these valuations. Propose two different business plans that would be targeting these two different outcomes. Make sure the ratios embedded in your projections conform to reasonable operating ratio assumptions in the models. Also remember that higher risk business strategies come with higher expected returns. 3. Discuss the $31 and $56 IPO prices for Wok Yow within the context of comparable firms and their multiples. You can use some outside reference materials from companies in similar industries for comparison purposes. Then take a position on whether you would recommend the $31 or $56 IPO. Which one is more feasible? Take a position on which of the two business plans you would invest in as an investor, which financial instrument of the company you would want to invest in and what kind of a return you would expect on your money. 4. Prepare an executive summary discussing the events and decisions leading to its current situation, the options it currently has moving forward, and your recommendations for Wok Yow's near future. The events in the summary will be fictional. WOK YON PORTS, INC. Enterprise (Entity Valuation Solution Parts Athrough Chapter 1 Mini Case Percent Change in - 07-CT/C Proforma THEO D7 #4 FFET/E7 - E7F7F1 +4 +40VG7 #ET-OTOT #FIETY #G7F7)FT 2 2019 Thousands of Dolas NOPAT Statements Ses Cost of Goods Sold Grass Pot SGIA Expenses Degtalon EBIT Nol 2016 Actual Sales 2016 1 $50 +C8C7 C705 349C7 C7408 =+C1007 ---C7'02 C1107 ECTODE =+C1207 +09+C18-C11 0 0 =+C1407 =+C12C13 +C150 5x1404 =+C1807C14055 2005 +D708 *02 05 +09+010011 SEO. #E1-E8 =t-E702 stE705 D#EDE011 3.5705 3-F1+F! ..F702 4F70.05 -F9+F10-F11 2.6705 ==G7+ -GP02 --G7005 - GG10-G11 2121 =+G71.06 BH05 E+ *#02 **17006 +9+10+11 Purant Change z+DICTYCY Perpart of Nets 26 2017 C7C71 - 0707 30C2 =DAUT #C9C7 S+D9D =+DIODT C1107 --C1207 3401207 5+C3C7 201307 2C14C7 --01407 C15C7 3-D1507 =+C18C7 D1801 2013 2099 1E7E7 SHF71FT EDOFT E9E7 2487 --E1U67 2413F7 =-51185 F11FT +E12ET FFT +E13E7 F3FT +E14E7 -F14F7 s+E6E7 =-F15 FT E6E7 F76F7 2020 GGT) GAGI +G9G7 =+G17G7 =+G1G7 -G2G7 34G1367 *+G14G7 G1967 --G16G7 Teres 14 NOPAT ) =-012-010 501404 +014-05 -E12-E13 SE404 1-E15 F12413 5.5194 --F144F15 +6120G13 56494 =+G14-G15 =+H12-13 S4414 =+14H15 +HP03683 =C18C7 C703601 323C7 C7.1987 =+C1-C20 Requined Net Working Capital Recas Recebehertores Mnus Pazoleonas Rec Net Woning Capla RNC horse RWC Fred Asses Schedule Net Fred Asses (NFA hcrease in NFA Plus Depreciation CAPEX 1400 m st_070.1997 2019-020 =+025-021 -E70 2020 0.1667 --E19E%! -E21-021 =+F703060 BF70.1887 +F19-F20 #21521 #G73008 =-670.1997 24G+9+G2 *G21-F21 =+H19-20 24H21-G21 *CWC7 C74.300 *#73000 2534014 =DP036 2004-24 011 #065-026 F703030 --F24E24 2-311 *F25-F28 =G 2133 =+G24F24 s:611 G2S+G2 2-1003333 =--21-24 =-11 ---25-28 -E25+E28 1-06 Free Cast Pows to Entity NCPAT Plus: Depreciation Minus CAPEX Vinus nosten WC Operating Fire Cast Rous 2011 11 2017 =#15 318 =+G15 24F11 =t-G11 2527 =t-627 2+522 2.62 E16-ENE30E81 +F16-F31+F2-F30 --G6+631-32-33 +16+W31-32-33 s+019081-03208 Terminal Ver g =18 Total Free Cash Pous TFCF) PV of FOF118% Discount Rate --034+086 PVP, DIT GIT) =+G84+G) MINICASE Wok Yow Imports, Inc. Wok Yow Imports, Inc., is a rapidly growing, closely held corporation that imports and sells Asian style furniture and accessories at several retail outlets. The equity owners are considering selling the venture and want to estimate the enterprise or entity value and then determine the value of the venture's equity. Following is last year's income statement (2013) and projected income statements for the next four years (2014-2017). Sales are expected to grow at an annual 6 percent rate beginning in 2018 and thereafter. ACTUAL PROJECTED [S THOUSANDS] 2013 2014 2015 2016 2017 $150.0 $300.0 -150.0 $350.0 -175.0 -75.0 75.0 150.0 175.0 $200.0 -100.0 100.0 -40.0 -10.0 50.0 Net sales Cost of goods sold Gross profit SG&A expenses Depreciation EBIT Interest Earnings before taxes Taxes (40% rate) Net income $250.0 -125.0 125.0 -50.0 -12.5 62.5 -30.0 -7.5 37.5 -3.5 -70.0 -17.5 87.5 -3.5 84.0 -33.6 -3.5 -60.0 -15.0 75.0 -3.5 71.5 -28.6 42.9 -3.5 34.0 -13.6 20.4 46.5 -18.6 27.9 59.0 -23.6 35.4 50.4 Selected balance sheet accounts at the end of 2013 are as follows: Required cash, accounts receivable, and inventory accounts totaled $50,000; net fixed assets were $50,000; and accounts payable and accruals totaled $25,000. Each of these accounts was expected to grow with sales over time. Long-term debt was $30,000, and there were 10,000 shares of common stock outstanding at the end of 2013. Data have been gathered for Fine Furniture Products, a comparable publicly traded firm in Wok Yow's industry. Fine Furniture's risk index is judged to be 2.00, compared to a risk index of 1.00 for firms of average riskiness. Management believes that a 2.00 adjustment factor should be multiplied times the expected market risk premium for average firms to reflect Wok Yow's (and Fine Furniture's) relatively greater riskiness. Wok Yow's long-term debt to long-term capital (long- term debt plus equity) ratio was 40 percent at the end of 2013. The interest rate on long-term U.S. government bonds is 7 percent, Wok Yow could issue new long-term debt at a 12 percent rate, and the average expected market risk premium (common stocks over government bonds) is 7.5 percent for average firms. A. Project Wok Yow's NOPAT statements for 2014 to 2018. B. Determine the annual increases in required net working capital and capital expenditures (CAPEX) for Wok Yow for the years 2014 to 2018 C. Project annual operating free cash flows to the entity for the years 2014 to 2018. D. Management initially thought that an 18 percent discount rate was reasonable. E. Use the information from Part D to estimate Wok Yow's terminal value cash flow at the end of 2017. F. Estimate the firm's enterprise or entity value at the end of 2013. G. Adjust the enterprise value to determine Wok Yow's equity value in dollars and on a per-share basis at the end of 2013 H. Now estimate Wok Yow's after-tax cost of long-term debt. Use the risk-free rate, the expected market risk premium, and the risk index for Fine Furniture Company to estimate Wok Yow's cost of equity capital. Determine Wok Yow's weighted average cost of capital (WACC). Reestimate Wok Yow's enterprise value using the WACC calculated in Part H. Then adjust the enterprise value to determine Wok Yow's equity value in dollars and on a per-share basis at the end of 2013 H I J K L 6.0% 16.7% B C D E F G 1 WOK YOW IMPORTS, INC. 2 Enterprise (Entity) Valuation Solution [Parts A through G): 3 Chapter 14 Mini Case Percent Change In Net Sales % of 33.3% 25.0% 20.0% 16.7% 5 (Thousands of Dollars) 2016 Actual Pro forma- 6 NOPAT Statements Sales 2016 2017 2018 2019 2020 7 Net Sales 100.0% 150.0 200.0 2500 300.0 350.0 8 Cost of Goods Sold 50.0% -75.0 -100.0 -1250 -150.0 -175.0 9 Gross Profit 50.0% 75.0 100.0 125.0 150.0 175.0 10 SG&A Expenses -20.0% -30.0 40.0 50.0 60.0 -70.0 11 Depreciation 5.0% -7.5 -10.0 12.5 15.0 17.5 12 EBIT 25.0% 37.5 50.0 62.5 75.0 87.5 13 Interest 0.0% 0.0 0.0 0.0 14 EBT 25.0% 50.0 62.5 75.0_ 87.5 15 Taxes (40% rate) -10.0% -20.0 25.0 30.0 35.0 16 NOPAT 15.0% 22.5 30.0 30.0 37.5 45.0 52.5 2021 371.0 -185.5 185.5 -74.2 18.6 92.8 Percent Change in Net Sales 33.3% 25.0% 20.0% Percent of Net Sales 2016 2017 2018 2019 100.0% 100.0% 100.0% 100.0% -50.0% -50.0% -50.0% -50.0% 50.0% 50.0% 50.0% 50.0% -20.0% 20.0% -20.0% 20.0% -5.0% 5.0% 5.0% 5.0% 25.0% 25.0% 25.0% 25.0% 0.0% 0.0% 0.0% 0.0% 25.0% 25.0% 25.0% 25.0% -10.0% -10.0% -10.0% 100% 15.0% 15.0% 15.0% 15.0% 2020 100.0% 50.0% 50.0% 20.0% 5.0% 25.0% 0.0% 25.0% -10.0% 15.0% 37.5 92.8 55.7 33.3% -16.7% 50.0 -25.0 25.0 83.3 41.7 41.7 8.3 100.0 50.0 50.0 8.3 116.7 58.3 58.3 8.3 123.7 61.8 61.8 3.5 33.3% 50.0 83.3 16.7 12.5 29.2 100.0 16.7 15.0 31.7 116.7 16.7 17.5 34.2 123.7 7.0 18.6 25.5 26.7 18 Required Net Working Capital: 19 Reg Cash+Receivables Inventories 20 Minus: Payables Accruals 21 Req Net Working Capital (RNWC) 22 Increase in RNWC 23 Fixed Assets Schedule: 24 Net Foxed Assets (NFA) 25 Increase in NFA 26 Plus: Depreciation 27 CAPEX 28 29 Free Cash Flows to Entity: 30 NOPAT 31 Plus: Depreciation 32 Minus: CAPEX 33 Minus: Increase in NWC 34 Operating Free Cash Flows 35 36 Terminal Value CF (r 18,9 -06) 37 Total Free Cash Flows (TFCF) 38 PV of TFCF (18% Discount Rate) 39 Less: LTD Value 40 Equity Value 41 Value Per Share (10,000 shares) 42 30.0 10.0 -26.7 -8.2 5.0 37.5 12.5 29.2 8.3 12.4 45.0 15.0 -31.7 8.3 20.0 52.5 17.5 34.2 8.3 27.5 55.7 18.6 -25.5 45.2 5.0 12.4 20.0 403.8 $233.6 $30.0 $203.6 $20.36 WOK YOW IMPORTS, INC. Enterprise (Entity) Valuation Solution Parts Hand 1]: 16.7% 6.0% 20.0% 16.75 Thousands of Dollars] NOPAT Statements Net Sales Cost of Goods Sold Gross Profit SG&A Expenses Depreciation EBIT Interest EBT Taxes (40% rate) NOPAT % of 2016 Sales 100.0% -50.0% 50.0% -20.0% 35.0% 25.0% 0.0% 25.0% -10.0% 15.0% Actual 2016 150.0 OU 75.0 -30.0 Percent Change in Net Sales 33.3% 25.0% 20.0% Pro forma 2017 2018 2019 200.0 2500 300.0 -100.0 125.0 150.0 100.0 125.0 150.0 40.0 -60. 0 6 0.0 0 1 2-5 -150 50.0 62.5 75.0 0.0 0.0 0.0 50.0 62.5 75.0 -20.0 -25.0 30.0 30.0 37.5 45.0 2020 380.0 175.0 1750 -70.0 175 87.6 0.0 87.5 35.0 52.5 2021 371.0 186.5 185.5 -74.2 -18.6 92.8 0.0 92.8 Percent Change in Net Sales 33.3% 25.0% Percent of Net Sales 2016 2017 2018 100.0% 100.0% 100.0% -50 0% 50.0% -50.0% 50.0% 50.0% 0.0% -20.0% 20.0% -20.0% -5.0% -5,0% -5,0% 25.0% 25.0% 25.0% 0.0% 0.0% 0.0% 25.0% 25.0% 25.0% -10.0% 100% -100% 15.0% 15.0% 2019 100.0% 0.0% 50.0% -20.0% -6.0% 25.0% 0.0% 25.0% -10.0% 15.0% 2020 100.0% 0.0% 50.0% 20.0% -6.0% 25 0% 0.0% 25.0% -100% 15.0% 37.5 0.0 37.5 22.5 15.0% 83.3 33.3% -16.7% 500 25.0 25.0 86.7 -33.3 33.3 41.7 8.3 100.0 -50.0 50.0 8.3 116.7 58.3 58. 3 8.3 123.7 61.8 61.8 3.5 8.3 85 Required Net Working Capital: Reg Cash+Receivables+Inventories Minus: Payables+Accruals Reg Net Working Capital (RNWC) Increase in RNWC Fixed Assets Schedule: Net Fixed Assets (NFA) Increase in NFA Plus: Depreciation CAPEX 33.3% 50.0 86.6 16.7 100 26.7 83.3 16.7 12.5 29.2 100.0 16.7 15.0 31.7 116.7 16.7 17.5 34.2 123.7 7.0 18.6 25.5 Fro. Cash Flows to Entity: NOPAT Plus: Depreciation Minus: CAPEX Minus: Increase in NWC Operating Free Cash Flows 30.0 10.0 -26.7 8.3 37.5 12.5 -29.2 12.4 8.2 45.0 15.0 -31.7 8.3 52.5 17.5 -34.2 8.3 27.5 55.7 18.6 25.5 -3.5 45.2 12.4 20.0 Terminal Value CF (r = .161.9 - .06) Total Free Cash Flows (TFCF) PV of TFCF (16.1% Discount Rate) Less: LTD Value Equity Value Value Per Share (10,000 shares) $270.1 $30.0 $240.1 $24.01 Cost of Capital Workshoot: "Comparable Firm Risk Index Cost of Equity Capital A-T Cost of LTD Capital WACC 2.00 0.220 0.072 0.161 Using the provided financial statements as a starting point: 1. The DCF valuation and pro forma financials with five years of forecasted growth rates are provided in the original model. Please modify the model to consider a more successful scenario where Wok Yow's sales grow at a more aggressive pace of 40% for five years and then flatten to a more sustainable growth rate of 7%. What would the stock value per share be under the new scenario? What kind of strategic changes you would make in the business model to justify the growth assumption? How would you do things differently? You can use fictional events to justify your assumptions. 2. Prepare and present DCF valuations and pro forma financial statements (five-year explicit period) that justify a $31 and a $56 share price. You can play with the model assumptions to get to these valuations. Propose two different business plans that would be targeting these two different outcomes. Make sure the ratios embedded in your projections conform to reasonable operating ratio assumptions in the models. Also remember that higher risk business strategies come with higher expected returns. 3. Discuss the $31 and $56 IPO prices for Wok Yow within the context of comparable firms and their multiples. You can use some outside reference materials from companies in similar industries for comparison purposes. Then take a position on whether you would recommend the $31 or $56 IPO. Which one is more feasible? Take a position on which of the two business plans you would invest in as an investor, which financial instrument of the company you would want to invest in and what kind of a return you would expect on your money. 4. Prepare an executive summary discussing the events and decisions leading to its current situation, the options it currently has moving forward, and your recommendations for Wok Yow's near future. The events in the summary will be fictional. WOK YON PORTS, INC. Enterprise (Entity Valuation Solution Parts Athrough Chapter 1 Mini Case Percent Change in - 07-CT/C Proforma THEO D7 #4 FFET/E7 - E7F7F1 +4 +40VG7 #ET-OTOT #FIETY #G7F7)FT 2 2019 Thousands of Dolas NOPAT Statements Ses Cost of Goods Sold Grass Pot SGIA Expenses Degtalon EBIT Nol 2016 Actual Sales 2016 1 $50 +C8C7 C705 349C7 C7408 =+C1007 ---C7'02 C1107 ECTODE =+C1207 +09+C18-C11 0 0 =+C1407 =+C12C13 +C150 5x1404 =+C1807C14055 2005 +D708 *02 05 +09+010011 SEO. #E1-E8 =t-E702 stE705 D#EDE011 3.5705 3-F1+F! ..F702 4F70.05 -F9+F10-F11 2.6705 ==G7+ -GP02 --G7005 - GG10-G11 2121 =+G71.06 BH05 E+ *#02 **17006 +9+10+11 Purant Change z+DICTYCY Perpart of Nets 26 2017 C7C71 - 0707 30C2 =DAUT #C9C7 S+D9D =+DIODT C1107 --C1207 3401207 5+C3C7 201307 2C14C7 --01407 C15C7 3-D1507 =+C18C7 D1801 2013 2099 1E7E7 SHF71FT EDOFT E9E7 2487 --E1U67 2413F7 =-51185 F11FT +E12ET FFT +E13E7 F3FT +E14E7 -F14F7 s+E6E7 =-F15 FT E6E7 F76F7 2020 GGT) GAGI +G9G7 =+G17G7 =+G1G7 -G2G7 34G1367 *+G14G7 G1967 --G16G7 Teres 14 NOPAT ) =-012-010 501404 +014-05 -E12-E13 SE404 1-E15 F12413 5.5194 --F144F15 +6120G13 56494 =+G14-G15 =+H12-13 S4414 =+14H15 +HP03683 =C18C7 C703601 323C7 C7.1987 =+C1-C20 Requined Net Working Capital Recas Recebehertores Mnus Pazoleonas Rec Net Woning Capla RNC horse RWC Fred Asses Schedule Net Fred Asses (NFA hcrease in NFA Plus Depreciation CAPEX 1400 m st_070.1997 2019-020 =+025-021 -E70 2020 0.1667 --E19E%! -E21-021 =+F703060 BF70.1887 +F19-F20 #21521 #G73008 =-670.1997 24G+9+G2 *G21-F21 =+H19-20 24H21-G21 *CWC7 C74.300 *#73000 2534014 =DP036 2004-24 011 #065-026 F703030 --F24E24 2-311 *F25-F28 =G 2133 =+G24F24 s:611 G2S+G2 2-1003333 =--21-24 =-11 ---25-28 -E25+E28 1-06 Free Cast Pows to Entity NCPAT Plus: Depreciation Minus CAPEX Vinus nosten WC Operating Fire Cast Rous 2011 11 2017 =#15 318 =+G15 24F11 =t-G11 2527 =t-627 2+522 2.62 E16-ENE30E81 +F16-F31+F2-F30 --G6+631-32-33 +16+W31-32-33 s+019081-03208 Terminal Ver g =18 Total Free Cash Pous TFCF) PV of FOF118% Discount Rate --034+086 PVP, DIT GIT) =+G84+G)