Question 3 on Business Valuation - (40 Marks)

You have been hired as a financial modelling consultant by High-as-a-Kite (HAAK) and have been requested to modify the HAAK financial model. Only the pro-forma financial information for the Income Statement and the Balance Sheet has been completed.

You have been asked to make several changes to the financial model.

Remember to use good modeling practices as discussed in the class.

Data shell: Ques 3 (Shell)

Required:

Part 1:

Please make the following changes to the HAAK valuation model:

1. Let debt (i.e., bank loans) be the plug in the pro-forma financial statements and keep cash constant over the planning horizon at $1,500,000 for the period from 2019 to 2023, inclusive. (Note that debt is not reduced by 500,000 every year, as it was in the original model.) You can assume that no additional common stock is issued. Based on this change, what is the ending debt balance in 2023?

2. Using the revised model, calculate the free cash flows for each year in the forecast period.

3. Using the revised model, calculate the terminal value in 2023.

4. Using the revised model, calculate the per share value assuming there are one million shares outstanding.

5. Using the revised model, prepare the sensitivity analysis (using a one-way data table) for sales growth and share value (include a graph in your analysis).

6. Why do we add back interest expense on debt when determining free cash flows?

7. What do we mean by terminal value (i.e., what does it represent)? Explain fully.

8. What are some of the limitations of this model? Discuss briefly.

(Please save part 1 of the question as a separate worksheet in your Excel workbook.)