Question
Please see financial statements below for your project assignment. Your brother-in-law's firm is getting ready to be sold so he can move to Florida and
Please see financial statements below for your project assignment.
Your brother-in-law's firm is getting ready to be sold so he can move to Florida and sell t-shirts for a living. You are required to provide a valuation of the business based upon the financial statements below, as well as five-year projections for any buyer who might be interested in purchasing the company. You are to use the method(s) from chapters 8 & 9 for your calculations, and they need to be quantified.
The forward P/E is 12, and there is a 2x market multiple.
Actual | Forecast | Forecast | Forecast | Forecast | ||
2021 | 2022 | 2023 | 2024 | 2025 | ||
Net sales | $3,500 | |||||
Cash | 20% of sales | $700 | ||||
Accounts receivable | 80% of sales | $2,800 | ||||
Inventories | 35% of sales | $1,225 | ||||
Net fixed assets | Fixed | $750 | ||||
Accts. pay. & accruals | 5% of sales | $175 | ||||
Op. costs (excl. depr.) | 85% of sales | $2,975 | ||||
Depreciation | 10% of fixed assets | $75 | ||||
EBIT | $450 |
Assumptions | |||
Growth rate beyond 2021 is 5% | |||
WACC = 8.5% | |||
Market value of all debt is $500,000 | |||
Market Value of preferred stock is $500,000 | |||
Outstanding shares of common stock 100,000 | |||
Tax rate 40% |
Year | FCF |
2017 | $200,000 |
2018 | $275,000 |
2019 | $450,000 |
2020 | $600,000 |
2021 | $800,000 |
You just received a call from a potential buyer for your brother-in-law's business, but the buyer is quite concerned about interest rates going up. The buyer is suggesting that the Federal Reserve will likely raise interest rates by .50 at their next meeting, which will impact your WACC.
Please run a second set of figures using a new WACC reflecting this forecast
Calculate Forecasted FCF
NOPAT == EBIT(1 - T)
NOWC == (Cash ++ accounts receivable ++ inventories) - (Accounts payable & accruals)
Total operating capital == NOWC ++ Net fixed assets
FCF == NOPAT - Change in total operating capital
ROIC == NOPAT/(Total operating capital)
Value of operation
Vop = FCF1/ (WACC_gL)
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