1. (14 Points) You are working for a private equity firm and your team is assigned the task of

determining the enterprise value of a target firm. This target firm’s past and current Income

statements and other key accounts (from the Balance Sheet and the Statement of Cash Flows)

are presented in the MS Excel file (attached).

Based on your team’s analysis, you expect the following net sales growth for this target firm:

Year	Expected Net Sales Growth
2022	9.00%
2023	8.40%
2024	7.60%
2025	7.10%
2026	6.50%
2027	6.00%
2028onwards	3.50%

During your team meetings, you agreed upon using the following rules in the enterprise value

calculation:

• The EBIT to Net Sales ratio will be constant in the future, and it is equal to the average EBIT to

Net Sales ratio of the last three years.

• Capital Expenditures (CAPEX) will be 8% of Net Sales each year.

• Depreciation Expense will be 120% of the Capital Expenditures each year.

• Net Working Capital change will be 12% of the Net Sales change each year.

a. (8 Points) If your team believes that the proper discount rate for this target firm valuation is

14.10% pa, what is the enterprise value (EV) of this target firm as of January 2022?

b. (3 Points) If this firm has 43M shares outstanding, what is the fair value of this target firm’s

stock?

c. (3 Points) If this firm’s stock was trading at $18 per share in the market, what kind of (and how

big of) a correction did you expect to see? (Please calculate the percentage change you expect

to see and briefly explain your logic)

 

Financial Statements Net Sales COGS Gross Margin Portfolio Data 3 Marketing Expense Depreciation Expense General and Administrative Expense Total Operating Expenses Operating Income Interest Expense Income before Income Tax Income Tax Expense Net Income 2021 $418,500 ($205,000) $213,500 ($38,200) ($41,200) ($45,700) ($125,100) $88,400 ($16,000) $72,400 ($18,100) $54,300 Portfolio Data 4 2020 $347,500 ($176,500) $171,000 ($28,500) ($38,600) ($40,900) ($108,000) $63,000 ($16,000) $47,000 ($11,750) $35,250 Portfolio Data 5 2019 $298,000 ($160,200) $137,800 ($23,000) ($34,400) ($38,600) ($96,000) $41,800 ($16,000) $25,800 ($6,450) $19,350 B E Beta_Raw Data Current Assets Current Liabilities Total Debt Total Cash CAPEX (from Statement of cash flows) No of shares outstanding 2021 $129,400 $78,200 102,900 74,300 2021 $34,500 43,000,000 * All numbers in the statements are in $1,000s 2020 $120,750 $75,100 98,100 72,500 2020 $20,500 2019 $110,800 $71,600 96,500 72,000 2019 $17,200 2018 $105,300 $68,800 92,500 67,700