Problem set 3 (35%) Your consulting company wants to evaluate purchasing a company, implementing f improvement, and selling the company at the end of five years. The acquisition price for this company's equity is $150 million. All the relevant financial information is provided. Ratio P/E EV/Sales EV/EBITDA EBITDA/Sales Ideko (Proposed) 21.6x 2.0x 9.1x 21.7% Oakley, Inc. 24.8x 2.0x 11.6% 17.0% Luxottica Group 28.0x 2.7x 14.4x 18.5% N ike, Inc. 18.2x 1.5x 9.3x 15.9% Sporting Goods Industry 20.3x 1.44 11.4x 12.1% 2005 2006 2007 2008 2009 2010 Capital Expenditure Opening Book Value Capital Investment Depreciation Closing Book Value 50,000 5,000 -5,500 49,500 49,500 5,000 -5,450 49,050 49,050 5,000 -5,405 48,645 48,645 20,000 -6,865 61,781 61,781 15,000 -7,678 69,102 69,102 8,000 -7,710 69,392 Debt Balance Interest (6.8%) 2005 100,000 2006 100,000 2007 100,000 2008 115,000 2009 120,000 2010 120,000 Acquisition Financing (S 000) Sources 1 New Term Loan 2 Excess Ideko Cash 3 KKP Equity Investment 4 Total Sources of Funds 100,000 6,500 53,000 159,500 Uses Purchase Ideko Equity Repay Existing Ideko Debt Advisory and Other Fees Total Uses of Funds 150,000 4,500 5.000 159,500 Income Statement ($ 000) 1 Sales 2 Cost of Goods Sold 3 Raw Materials 4 Direct Labor Costs 5 Gross Profit 6 Sales and Marketing 7 Administrative 8 EBITDA 9 Depreciation 10 EBIT 11 Interest Expense (net) 12 Pretax Income 13 Income Tax 14 Net Income 2005 Year 2006 2007 2008 2009 2010 75,000 88,358 103,234 119,777 138,149 158,526 (16,000) (18,665) (21,593) (24,808) (28,333) (32,193) (18,000) (21,622) (25,757) (30,471) (35,834) (41,925) 41,000 48,071 55,883 64,498 73,982 84,407 (11,250) (14,579) (18,582) (23,356) (27,630) (31,705) (13,500) (13,254) (15,485) (16,769) (17,959) (20,608) 16,250 20.238 21,816 24,373 28,393 32,094 (5,500) (5,450) (5,405) (6,865) (7,678) (7,710) 10,750 14,788 16,411 17,508 20,715 24,383 (75) (6,800) (6,800) (6,800) (7.820) (8,160) 10,675 7,988 9,611 10,708 12,895 16,223 (3,736) (2.796) (3,364) (3,748) (4,513) (5,678) 6,9395,193 6,247 6,960 8,382 10,545 Net Working Capital Increase in NWC 2005 26,168 2006 22,756 2007 26,419 2008 30,509 2009 35,194 2010 40,425 (1) Prepare the Free Cash Flow Forecast (10%) 2006 2007 2008 2009 2010 7 Free Cash Flow of Firm 10 Free Cash Flow to Equity (2) Using the EBITDA multiple, estimate the continuation (terminal) enterprise value and equity value in 2010.(5%) Continuation Value Estimate for Ideko: U WN explain why use multiples. (3) Prepare a spreadsheet for adjusted present value (APV) estimate of the initial equity value of this company. Use the following formula and spreadsheet. T=35%. (10%) FCF, + V Interest Tax Shield, + T - 1 - = 1+ro Problem set 3 (35%) Your consulting company wants to evaluate purchasing a company, implementing f improvement, and selling the company at the end of five years. The acquisition price for this company's equity is $150 million. All the relevant financial information is provided. Ratio P/E EV/Sales EV/EBITDA EBITDA/Sales Ideko (Proposed) 21.6x 2.0x 9.1x 21.7% Oakley, Inc. 24.8x 2.0x 11.6% 17.0% Luxottica Group 28.0x 2.7x 14.4x 18.5% N ike, Inc. 18.2x 1.5x 9.3x 15.9% Sporting Goods Industry 20.3x 1.44 11.4x 12.1% 2005 2006 2007 2008 2009 2010 Capital Expenditure Opening Book Value Capital Investment Depreciation Closing Book Value 50,000 5,000 -5,500 49,500 49,500 5,000 -5,450 49,050 49,050 5,000 -5,405 48,645 48,645 20,000 -6,865 61,781 61,781 15,000 -7,678 69,102 69,102 8,000 -7,710 69,392 Debt Balance Interest (6.8%) 2005 100,000 2006 100,000 2007 100,000 2008 115,000 2009 120,000 2010 120,000 Acquisition Financing (S 000) Sources 1 New Term Loan 2 Excess Ideko Cash 3 KKP Equity Investment 4 Total Sources of Funds 100,000 6,500 53,000 159,500 Uses Purchase Ideko Equity Repay Existing Ideko Debt Advisory and Other Fees Total Uses of Funds 150,000 4,500 5.000 159,500 Income Statement ($ 000) 1 Sales 2 Cost of Goods Sold 3 Raw Materials 4 Direct Labor Costs 5 Gross Profit 6 Sales and Marketing 7 Administrative 8 EBITDA 9 Depreciation 10 EBIT 11 Interest Expense (net) 12 Pretax Income 13 Income Tax 14 Net Income 2005 Year 2006 2007 2008 2009 2010 75,000 88,358 103,234 119,777 138,149 158,526 (16,000) (18,665) (21,593) (24,808) (28,333) (32,193) (18,000) (21,622) (25,757) (30,471) (35,834) (41,925) 41,000 48,071 55,883 64,498 73,982 84,407 (11,250) (14,579) (18,582) (23,356) (27,630) (31,705) (13,500) (13,254) (15,485) (16,769) (17,959) (20,608) 16,250 20.238 21,816 24,373 28,393 32,094 (5,500) (5,450) (5,405) (6,865) (7,678) (7,710) 10,750 14,788 16,411 17,508 20,715 24,383 (75) (6,800) (6,800) (6,800) (7.820) (8,160) 10,675 7,988 9,611 10,708 12,895 16,223 (3,736) (2.796) (3,364) (3,748) (4,513) (5,678) 6,9395,193 6,247 6,960 8,382 10,545 Net Working Capital Increase in NWC 2005 26,168 2006 22,756 2007 26,419 2008 30,509 2009 35,194 2010 40,425 (1) Prepare the Free Cash Flow Forecast (10%) 2006 2007 2008 2009 2010 7 Free Cash Flow of Firm 10 Free Cash Flow to Equity (2) Using the EBITDA multiple, estimate the continuation (terminal) enterprise value and equity value in 2010.(5%) Continuation Value Estimate for Ideko: U WN explain why use multiples. (3) Prepare a spreadsheet for adjusted present value (APV) estimate of the initial equity value of this company. Use the following formula and spreadsheet. T=35%. (10%) FCF, + V Interest Tax Shield, + T - 1 - = 1+ro