Shopwithfriends.com, a new social media website that combines the social media and shopping experiences, has seen considerable revenue growth in the past few years and is considering an initial public offering (IPO) at the end of 2004. You have been hired by Shopwithfriends.coms current shareholders (a mixture of venture capital funds and wealthy individuals) to provide a fairness opinion as to the price of the IPO. Shopwithfriends.com expects revenue growth to taper off over the next three years eventually stabilizing at 5% for the long-term. Your research team has provided you with industry and market information including EBITDA multiples of comparable firms. The EBITDA multiples are from much larger companies and are more likely to represent the long-term prospects of Shopwithfriends.com. Thus, you should use the discounted cash-flow (DCF) methodology for the first three years (2005 to 2007) and use the EBITDA multiples to calculate the terminal value in 2007. The company plans to maintain a constant debt level, therefore, you should use the adjusted present value (APV) method (ie. value the free cash flows and tax shields separately). The firm will not make any capital expenditures in the next three years.

(ATTN: Repost because full question was not answered last time it was posted)

a) Using the provided financials and industry information project Shopwithfriends.coms income statement and balance sheet for the next three years (hint: use cash as the plug and hold other current liabilities at 0). Do this by filling in the attached income statement and balance sheet

b) Compute Shopwithfriends.coms free-cash-flows (FCF) for the next three years. Do this by filling in the provided FCF exhibit.

c) Using the average EBITDA multiple compute the terminal value of Shopwithfriends.com in 2007. Do this in the FCF exhibit.

d) Using the provided market information compute the appropriate discount rate for Shopwithfriends.coms free cash flow. Do this in the market information exhibit. e) Using the discount rate from part (d) compute the value of the unlevered firm. Do this in the FCF exhibit.

f) Given that Shopwithfriends.com plans to maintain a constant debt level compute the present value of the Shopwithfriends.coms interest tax shields. Do this in the FCF exhibit.

g) What is the value of the levered firm? Do this in the FCF exhibit.

h) Using the value from part (g) determine the value of each of the shares (assuming 100 million shares outstanding). Do this in the FCF exhibit.

Income statement (in millions) Projection 2005E 2006E 2007E 2003 2004 900.0 1000.0 Revenue Cost of Goods Sold (COGS) Gross Margin 450.0 450.0 500.0 500.0 Depreciation Sales General & Admin Research & Development 10.0 180.0 90.0 10.0 200.0 100.0 Operating Income (EBIT) Interest Expense @ 10% Earning before tax 170.0 190.0 5.0 5.0 165.0 185.0 Taxes 35% 57.8 64.8 Net income $107.3 120.3 Balance sheet (in millions) Projection 2003 2004 2005E 2006E 2007E Current assets $2.3 Cash Accounts receivable Inventory $ 97.5 200.0 180.0 4 Total current assets 227.3 347.5 Property plant and equipment 100.0 100.0 Accumulated depreciation Property plant and equipment, net 80.0 70.0 Total assets 307.3 417.5 Liabilities 90.0 100.0 Accounts payable Other current liabilities Total current liabilities 110.0 120.0 Long-term debt2 50.0 50.0 Shareholders' equity Retained earnings 147.3 267.5 Total liabilities and equit S307.3 S 417.5 The equipment was purchased at the beginning of 2002 for $100 million and will be depreciated using the straight line method over the next 10 years (0 salvage value), there are no new capital expenditures 2 The company's long-term debt carries an interest rate of 10% Assume that other current liabilities will be zero for the next 3 years Market Information Assume that each of the comparable firms will maintain a permanent debt level and that the marginal tax rate is 35% for all of them Enterprise Value/ EBITDA Equity Beta Asset Beta Comp 1 Comp 2 Comp 3 35 170 0.8 1.3 1.9 0.10 0.25 0.5 Average 5.0% 7.50% Risk Free Rate Market Risk Premiu Unlevered Cost of Capital Free Cash Flow (in millions) Projection 2004 150 2005E 2006E 2007E NWC ANWC 2005E 2006E 2007E EBIT* (1-tax) +Depreciation ANWC -Cap ex FCF Timeline 0 Discount factor Terminal Value DCF Unlevered firm value + PV( Tax shields) Levered firm value Debt Value of equit Number of shares Price per share Industry data 2004 20% Expected ratios 2005E 2006E 2007E 10% 2003 Revenue Growth 25% 15% 5% COGS SG&A R&D 50% 20% 10% 50% 20% 10% 50% 20% 10% 50% 20% 10% 50% 20% 10% AR/Sales Inventory/COGS 0.10 0.10 AP/COGS 0.20 0.10 0.20 0.20 0.20 0.20 0.20 0.10 0.10 0.20 0.20 0.20 0.20