Part A. Often the Discounted Cash Flow (DCF) approach to valuation is unattractive because of the subjective nature of Cash Flow (CF) estimates. In industries where standard Valuation multiples are available, they are an alternative to DCF analysis. Consider the following: The owner of a new venture needs to establish a favorable valuation for her business in order to attract external investment on acceptable terms. The companys last year of operation was relatively successful, but enhanced projected value creation is essential to finding the right investment deal. The company operates in an industry where valuation for harvest or sale events is typically based on EBIT or EBITDA multiples. A number of recent transactions have established valuations at an average of 7 times EBITDA. The owner/entrepreneur believes a MINIMUM valuation of $ 28,000,000 is necessary to support $ 2,500,000 in new financing on acceptable terms.

Last Years Income Statement was as follows:

SALES 11,550,000

Variable Expenses 6,352,500

Contribution Margin 5,197,500

Fixed Expenses 3,225,000

Depreciation Expense 900,000

Earnings Before Interest & Taxes (EBIT) 1,072,500

Given last years cost structure, what Sales level is necessary to support the Owners $ 28,000,000 minimum (floor) value? (2.5)

(This is simple arithmetic!!!) Suppose Sales are projected to increase next year; but the need to create additional capacity is expected to cause Fixed Expenses to increase to $4,000,000, while deductible Depreciation Expense will decrease to $750,000. The Contribution Margin percentage (%) is expected to be unchanged during the valuation planning horizon. If the owners project Sales to grow 80% next year, and they believe 8 times EBITDA is a justifiable valuation multiple, what value would the owners place on the company next year? (4.5)