Seminar Questions for The Arcadian Microarray Technologies, Inc. Case
- Prepare to explain the implications of case Exhibit 1 (Paige Simons first task). Based on that exhibit, is terminal value a material component of firm values?
- Drawing on case Exhibit 4 and your own general knowledge, where would the various estimators be appropriate? Where would they be inappropriate? (Simons second task)
- Regarding the cash flow forecasts in case Exhibit 5, at what point in the future would you set the forecast horizon for the three investments? Why? More generally, what should determine when you stop forecasting annual cash flows and estimate a terminal value?
- Estimate other terminal values based on alternate estimation approaches. From these various estimates, please triangulate toward a single composite estimate of terminal value for each of Sierra Capital and Arcadians forecasts.
What is the resulting present value (PV) of cash flows under Sierra Capital and Arcadians outlook?
How significant was TV in creating the difference between the two present value estimates?
- As a general matter in valuation work, how much attention should terminal value garner? What short list of questions about TV could you keep on hand in case a client asked you to opine on a valuation of that company?
Exhibit 1 ARCADIAN MICROARRAY TECHNOLOGIES, INC. Cash Flow Forecast by Arcadian Management 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 $285 210 186 352 $1 12 0 0 13 10 3 21 Actual INCOME STATEMENT 2004 Sales Clinical microarrays SO Research microarrays 2 Royalties and other revenue 0 Human therapeutics 0 Total sales 2 Cost of sales 7 Gross profits (5) Contract revenue 16 Operating expenses Research & development 14 Selling, general & admin. 12 Total expenses 26 Other income 3 Income before taxes (12) Taxes 0 Net income ($12) S15 28 2 0 45 21 24 23 S56 45 13 0 114 41 73 15 $107 75 52 8 242 84 158 12 S181 110 106 57 454 159 295 4 S249 135 146 171 701 246 455 3 $274 165 166 250 855 322 533 3 $282 190 174 330 976 335 641 3 $289 225 189 362 1,065 361 704 3 1,033 ; 350 683 3 20 15 35 2 (9) 0 (59) 24 24 48 2 1 5 (S4) 18 45 63 0 25 9 $16 21 93 114 (3) 53 19 $35 21 176 197 (10) 92 32 $60 32 259 291 (25) 142 57 $85 43 323 366 (38) 132 76 $56 51 369 420 (43) 181 89 $92 52 372 424 (37) 225 90 $135 50 349 399 (20) 288 85 $203 FREE CASH FLOW Net income Noncash items Working capital Capital expenditures Free cash flow ($12) (59) (54) $16 $35 $60 $85 $56 $92 $135 0 1 2 2 6 10 18 19 15 8 (8) (12) (22) (63) (101) (118) (100) (61) 1 (15) (6) (5) (23) (53) (93) (111) (98) (66) (10) (531) ($22) ($19) ($27) (876) ($124) ($126) ($123) ($20) $134 S203 (1) 39 (10) $231 Exhibit 2 ARCADIAN MICROARRAY TECHNOLOGIES, INC. Cash Flow Forecast by Sierra Capital 2009 2010 2011 2012 2013 2014 2015 Actual INCOME STATEMENT 2004 2005 2006 2007 2008 Sales Clinical microarrays SO SO $2 $11 $22 Research microarrays 2 4 11 22 40 Royalties and other revenue 0 1 4 7 12 Human therapeutics 0 0 0 0 0 Total sales 2 5 17 40 74 Cost of sales 7 17 20 25 39 Gross profits (5) (12) (3) 15 35 Contract revenue 16 22 Operating expenses Research & development 14 23 25 27 29 Selling, general & admin. 12 21 25 32 44 Total expenses 26 44 50 59 73 Other income 3 0 0 1 (1) Income before taxes (12) (34) (31) (29) (27) Taxes 0 0 (0) 1 4 Net income ($12) (834) (831) (830) (831) $36 59 15 0 110 54 56 $56 89 25 0 170 72 98 $71 135 50 14 270 96 174 4 $85 145 60 56 346 124 222 4 $95 160 75 80 410 142 268 $106 185 91 110 492 154 338 S114 199 105 140 558 160 398 4 4 sila 33 37 64 87 96 124 (2) (2) (38) (24) (13) 4 ($25) (528) 44 104 147 (3) 28 11 $17 52 127 179 (2) 45 15 $30 53 138 191 0 80 27 $53 54 136 191 0 152 39 $112 58 136 194 3 210 48 $162 FREE CASH FLOW Net income Noncash items Working capital Capital expenditures Free cash flow (512) (534) (531) (530) (531) 2 3 3 3 4 (6) (6) (6) (7) (14) (15) (9) (9) (10) (831) (946) (843) (43) (551) ($25) (528) $17 6 8 10 (17) (19) (20) (11) (15) (18) (547) (854) ($11) $30 14 (28) (24) (58) $53 18 (16) (27) $28 $112 20 (6) (28) $98 $162 23 (6 (30) $149 Exhibit 3 ARCADIAN MICROARRAY TECHNOLOGIES, INC. Analysis of 5 year Dividends as % of Stock Price 2010 1.18 1.29 1.40 1.26 1.59 ... 1.24 BNSF Caterpillar Cooper Industries Cummins, Inc. Deluxe Corporation DO RR Donnelley Dun & Bradstreet Eaton Corp. Emerson Electric Co. Equifax FedEx Corporation Fluor Corporation Honeywell Int'l. Inc. Illinois Tool Works, Inc. Kelly Services Service Master Sherwin-Williams Co. Smurfit-Stone Cont. Co. Tenneco Weyerhauser Co. Recent Price $53 49 10 67 82 33 2 34 64 63 20 70 33 81 63 2 34 82 20 29 14 46 10 17 68 Projected Five-Year Annual Dividend Dividend Growth (%) $0.64 13.0% 0.80 10.0% 140 1.40 0.0% 1.20 1.0% To 1.48 1.5% 1.04 3.5% 0.00 0.0% 100 1.08 13.5% 250 1.60 7.5% 0.11 3.5% 0.29 13.0% 0.64 4.0% 0.75 3.0% 10 1.00 8.5% 1100 0.40 11.0% 0.43 2.5% 0.68 11.0% 1100 0.00 0.0% 0.00 0.0% 1.60 7.5% Beta 0.95 1.20 1.20 1.35 0.80 0.95 0.80 1.10 1.10 1.10 1.10 1.20 1.35 1.05 0.95 0.80 1.00 1.30 1.75 1.15 Present Percent of Value of Market Price Not Equity Five Years' Attributable to Cost Dividends Dividends 11.2% 3.36 94% 2 12.6% 3.74 % 92% 12.6% 4.98 93% 12.40 13.4% 4.30 95% 1070 10.4% 5.79 82% Ti 11.2% 4.21 88% 10.4% 0.00 100% 12.0% 5.62 91% 200 12.0% 7.08 90% 12.0% 0.44 99% ON 12.0% 0.00 100% 12.6% 2.54 96% 19.20 20 13.4% 2.84 92% *** 11.7% 4.58 94% 11.2% 1.99 93% 10 20 10.4% 1.73 87% 11.5% 3.36 226 93% 13.1% 0.00 100% 1000 15.5% 0.00 100% 12.3% 7.03 90% Average 93% 2006 0.72 0.88 1.40 1.21 1.50 150 100 1.08 0.00 1.23 1.72 0.11 0.33 0.67 24 0.77 1.09 0.44 0.44 0.75 0.00 0.00 1.72 Projected Annual Dividends Per Share 2007 2008 2009 0.82 0.92 1.04 0.97 1.06 1.17 10 1.40 1.40 1.40 1.22 1.24 1.25 155 155 1.52 1.55 1.57 115 1.11 1.15 1.19 0.00 0.00 0.00 1.39 1.58 1.79 105 100 1.85 1.99 2.14 0.12 013 09 0.12 0.13 0.37 0.42 0.47 0.69 0.72 0.75 05 0.80 0.82 0.84 no 1.18 1.39 0.49 0.55 0.61 0.45 45 0.46 046 0.47 0.84 0.93 1.03 0.00 0.00 0.00 0.00 0.00 0.00 1.85 1.99 2.14 0.00 2.03 20 2.30 0.13 0.53 20 0.78 0.87 1.50 0.67 0.49 1.15 0.00 0.00 2.30 1.28 % Exhibit 5 ARCADIAN MICROARRAY TECHNOLOGIES, INC. Cash Flows of Three Deals with Differing Rates of Development Projected Cash Flows by Investment 350 neno 300 250 200 150 Millions of Dollars 100 -Movie Studio -Bottling Plant + Toll Road 50 Movie Bottling Toll Studio Plant Road (520) (520) (520) (40) (60) 90 (60) (100) 169 (20) 5 172 0 10 176 20 20 179 30 40 183 50 65 187 75 115 190 100 150 194 90 180 198 80 190 202 60 200 206 55 204 210 70 208 214 85 212 219 95 216 223 105 221 227 130 225 232 150 230 237 140 234 241 160 246 190 251 225 249 256 240 254 261 266 264 272 260 269 277 265 275 283 270 280 288 Steady growth to infinity. Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31+ 0 3 5 7 9 11 13 15 17 19 21 23 25 27 29 -50 -100 -150 Year 239 244 230 255 259 Exhibit 6 ARCADIAN MICROARRAY TECHNOLOGIES, INC. Sensitivity Analysis, Present Value Varying by Terminal Value Growth Assumptions Arcadian's View 2% 20% SO Annual growth rate to infinity Weighted average cost of capital Annual capex (net of depr'n.) 2015 Annual addition to NWC 2015 Adjusted free cash flow 2015 Terminal value 2014 3% 4% 5% 6% 20% 20% 20% 20% (55) (512) (515) (520) (3) (5) (8) 194 185 180 174 1,173 1,200 1,257 1,314 7% 20% (528) (9) 165 1,355 202 1,142 PV of terminal value 2014 PV free cash flows 2005-2014 Total Present Value 185 189 194 203 212 219 (5151) (5151) (5151) (5151) (3151) (3151) S33 $38 $43 $52 $61 $68 Sierra Capital's View Annual growth rate to infinity Weighted average cost of capital Annual capex (net of depr'n.) 2016 Annual addition to NWC 2016 Adjusted free cash flow 2016 Terminal value 2015 2% 20% SO 3% 20% (55) (3) 177 1,073 4% 5% 20% 20% (512) (515) (5) 168 163 1,093 1,142 6% 20% (520) (8) 157 1,189 7% 20% (528) (9) 148 1,219 185 1,049 PV of terminal value 2015 PV free cash flows 2005-2015 Total Present Value 141 ($118) $23 144 147 ($118) ($118) $26 $29 154 ($118) $35 160 164 ($118) ($118) $42 $46 Exhibit 1 ARCADIAN MICROARRAY TECHNOLOGIES, INC. Cash Flow Forecast by Arcadian Management 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 $285 210 186 352 $1 12 0 0 13 10 3 21 Actual INCOME STATEMENT 2004 Sales Clinical microarrays SO Research microarrays 2 Royalties and other revenue 0 Human therapeutics 0 Total sales 2 Cost of sales 7 Gross profits (5) Contract revenue 16 Operating expenses Research & development 14 Selling, general & admin. 12 Total expenses 26 Other income 3 Income before taxes (12) Taxes 0 Net income ($12) S15 28 2 0 45 21 24 23 S56 45 13 0 114 41 73 15 $107 75 52 8 242 84 158 12 S181 110 106 57 454 159 295 4 S249 135 146 171 701 246 455 3 $274 165 166 250 855 322 533 3 $282 190 174 330 976 335 641 3 $289 225 189 362 1,065 361 704 3 1,033 ; 350 683 3 20 15 35 2 (9) 0 (59) 24 24 48 2 1 5 (S4) 18 45 63 0 25 9 $16 21 93 114 (3) 53 19 $35 21 176 197 (10) 92 32 $60 32 259 291 (25) 142 57 $85 43 323 366 (38) 132 76 $56 51 369 420 (43) 181 89 $92 52 372 424 (37) 225 90 $135 50 349 399 (20) 288 85 $203 FREE CASH FLOW Net income Noncash items Working capital Capital expenditures Free cash flow ($12) (59) (54) $16 $35 $60 $85 $56 $92 $135 0 1 2 2 6 10 18 19 15 8 (8) (12) (22) (63) (101) (118) (100) (61) 1 (15) (6) (5) (23) (53) (93) (111) (98) (66) (10) (531) ($22) ($19) ($27) (876) ($124) ($126) ($123) ($20) $134 S203 (1) 39 (10) $231 Exhibit 2 ARCADIAN MICROARRAY TECHNOLOGIES, INC. Cash Flow Forecast by Sierra Capital 2009 2010 2011 2012 2013 2014 2015 Actual INCOME STATEMENT 2004 2005 2006 2007 2008 Sales Clinical microarrays SO SO $2 $11 $22 Research microarrays 2 4 11 22 40 Royalties and other revenue 0 1 4 7 12 Human therapeutics 0 0 0 0 0 Total sales 2 5 17 40 74 Cost of sales 7 17 20 25 39 Gross profits (5) (12) (3) 15 35 Contract revenue 16 22 Operating expenses Research & development 14 23 25 27 29 Selling, general & admin. 12 21 25 32 44 Total expenses 26 44 50 59 73 Other income 3 0 0 1 (1) Income before taxes (12) (34) (31) (29) (27) Taxes 0 0 (0) 1 4 Net income ($12) (834) (831) (830) (831) $36 59 15 0 110 54 56 $56 89 25 0 170 72 98 $71 135 50 14 270 96 174 4 $85 145 60 56 346 124 222 4 $95 160 75 80 410 142 268 $106 185 91 110 492 154 338 S114 199 105 140 558 160 398 4 4 sila 33 37 64 87 96 124 (2) (2) (38) (24) (13) 4 ($25) (528) 44 104 147 (3) 28 11 $17 52 127 179 (2) 45 15 $30 53 138 191 0 80 27 $53 54 136 191 0 152 39 $112 58 136 194 3 210 48 $162 FREE CASH FLOW Net income Noncash items Working capital Capital expenditures Free cash flow (512) (534) (531) (530) (531) 2 3 3 3 4 (6) (6) (6) (7) (14) (15) (9) (9) (10) (831) (946) (843) (43) (551) ($25) (528) $17 6 8 10 (17) (19) (20) (11) (15) (18) (547) (854) ($11) $30 14 (28) (24) (58) $53 18 (16) (27) $28 $112 20 (6) (28) $98 $162 23 (6 (30) $149 Exhibit 3 ARCADIAN MICROARRAY TECHNOLOGIES, INC. Analysis of 5 year Dividends as % of Stock Price 2010 1.18 1.29 1.40 1.26 1.59 ... 1.24 BNSF Caterpillar Cooper Industries Cummins, Inc. Deluxe Corporation DO RR Donnelley Dun & Bradstreet Eaton Corp. Emerson Electric Co. Equifax FedEx Corporation Fluor Corporation Honeywell Int'l. Inc. Illinois Tool Works, Inc. Kelly Services Service Master Sherwin-Williams Co. Smurfit-Stone Cont. Co. Tenneco Weyerhauser Co. Recent Price $53 49 10 67 82 33 2 34 64 63 20 70 33 81 63 2 34 82 20 29 14 46 10 17 68 Projected Five-Year Annual Dividend Dividend Growth (%) $0.64 13.0% 0.80 10.0% 140 1.40 0.0% 1.20 1.0% To 1.48 1.5% 1.04 3.5% 0.00 0.0% 100 1.08 13.5% 250 1.60 7.5% 0.11 3.5% 0.29 13.0% 0.64 4.0% 0.75 3.0% 10 1.00 8.5% 1100 0.40 11.0% 0.43 2.5% 0.68 11.0% 1100 0.00 0.0% 0.00 0.0% 1.60 7.5% Beta 0.95 1.20 1.20 1.35 0.80 0.95 0.80 1.10 1.10 1.10 1.10 1.20 1.35 1.05 0.95 0.80 1.00 1.30 1.75 1.15 Present Percent of Value of Market Price Not Equity Five Years' Attributable to Cost Dividends Dividends 11.2% 3.36 94% 2 12.6% 3.74 % 92% 12.6% 4.98 93% 12.40 13.4% 4.30 95% 1070 10.4% 5.79 82% Ti 11.2% 4.21 88% 10.4% 0.00 100% 12.0% 5.62 91% 200 12.0% 7.08 90% 12.0% 0.44 99% ON 12.0% 0.00 100% 12.6% 2.54 96% 19.20 20 13.4% 2.84 92% *** 11.7% 4.58 94% 11.2% 1.99 93% 10 20 10.4% 1.73 87% 11.5% 3.36 226 93% 13.1% 0.00 100% 1000 15.5% 0.00 100% 12.3% 7.03 90% Average 93% 2006 0.72 0.88 1.40 1.21 1.50 150 100 1.08 0.00 1.23 1.72 0.11 0.33 0.67 24 0.77 1.09 0.44 0.44 0.75 0.00 0.00 1.72 Projected Annual Dividends Per Share 2007 2008 2009 0.82 0.92 1.04 0.97 1.06 1.17 10 1.40 1.40 1.40 1.22 1.24 1.25 155 155 1.52 1.55 1.57 115 1.11 1.15 1.19 0.00 0.00 0.00 1.39 1.58 1.79 105 100 1.85 1.99 2.14 0.12 013 09 0.12 0.13 0.37 0.42 0.47 0.69 0.72 0.75 05 0.80 0.82 0.84 no 1.18 1.39 0.49 0.55 0.61 0.45 45 0.46 046 0.47 0.84 0.93 1.03 0.00 0.00 0.00 0.00 0.00 0.00 1.85 1.99 2.14 0.00 2.03 20 2.30 0.13 0.53 20 0.78 0.87 1.50 0.67 0.49 1.15 0.00 0.00 2.30 1.28 % Exhibit 5 ARCADIAN MICROARRAY TECHNOLOGIES, INC. Cash Flows of Three Deals with Differing Rates of Development Projected Cash Flows by Investment 350 neno 300 250 200 150 Millions of Dollars 100 -Movie Studio -Bottling Plant + Toll Road 50 Movie Bottling Toll Studio Plant Road (520) (520) (520) (40) (60) 90 (60) (100) 169 (20) 5 172 0 10 176 20 20 179 30 40 183 50 65 187 75 115 190 100 150 194 90 180 198 80 190 202 60 200 206 55 204 210 70 208 214 85 212 219 95 216 223 105 221 227 130 225 232 150 230 237 140 234 241 160 246 190 251 225 249 256 240 254 261 266 264 272 260 269 277 265 275 283 270 280 288 Steady growth to infinity. Year 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31+ 0 3 5 7 9 11 13 15 17 19 21 23 25 27 29 -50 -100 -150 Year 239 244 230 255 259 Exhibit 6 ARCADIAN MICROARRAY TECHNOLOGIES, INC. Sensitivity Analysis, Present Value Varying by Terminal Value Growth Assumptions Arcadian's View 2% 20% SO Annual growth rate to infinity Weighted average cost of capital Annual capex (net of depr'n.) 2015 Annual addition to NWC 2015 Adjusted free cash flow 2015 Terminal value 2014 3% 4% 5% 6% 20% 20% 20% 20% (55) (512) (515) (520) (3) (5) (8) 194 185 180 174 1,173 1,200 1,257 1,314 7% 20% (528) (9) 165 1,355 202 1,142 PV of terminal value 2014 PV free cash flows 2005-2014 Total Present Value 185 189 194 203 212 219 (5151) (5151) (5151) (5151) (3151) (3151) S33 $38 $43 $52 $61 $68 Sierra Capital's View Annual growth rate to infinity Weighted average cost of capital Annual capex (net of depr'n.) 2016 Annual addition to NWC 2016 Adjusted free cash flow 2016 Terminal value 2015 2% 20% SO 3% 20% (55) (3) 177 1,073 4% 5% 20% 20% (512) (515) (5) 168 163 1,093 1,142 6% 20% (520) (8) 157 1,189 7% 20% (528) (9) 148 1,219 185 1,049 PV of terminal value 2015 PV free cash flows 2005-2015 Total Present Value 141 ($118) $23 144 147 ($118) ($118) $26 $29 154 ($118) $35 160 164 ($118) ($118) $42 $46
