The owners of Cengage's junior debt are unhappy with this potential outcome, because they believe the company will benefit more quickly from its move to digital products. They have prepared their own set of projections for the firm, which are provided in your additional excel spreadsheet on canvas (Cengage junior debtholders projections.xlsx). The debt structure at exit from bankruptcy would not be changed. Based on this information, they have hired you as their financial advisor to produce a discounted cash flow valuation of Cengage. 5a. What is the 2014 cash flow that you would discount in your DCF valuation, and briefly describe how it is calculated? Enter your value in $ millions, with one decimal place, followed by your expla on (enter as $xxx.x million ; "explanation). 5b. What is the 2015 cash flow that you would discount? 5c. What is the 2016 cash flow that you would discount? 5d. What is the 2017 cash flow that you would discount? 5e. What is the 2018 cash flow that you would discount? 5f. What is your terminal value of cash flows, stated as of 2018? 5g. What discount rate would you use to discount these cash flows, and briefly what inputs did you use to calculate that discount rate (enter as x.xx%; explanation") 5h. What is the TEV (at of June 30, 2013) from your DCF valuation? CENGAGE LEARNING REVISED BY JUNIOR DEBTHOLDERS: Projections of Postbankruptcy Performance See also the additional Important assumptions listed below in this sheet: Projected Income Statement (in millions of dollars) 2013E 2014E $1,713.6 FYE June 30, Net revenue Revenue growth Cost of goods sold Operating expenses, excluding depreciation Adjusted EBITDA Amortization of prepublication costs Restructuring charges Other expenses Depreciation Amortization of intangibles Operating income / (los) Operating income growth Operating margin Reorganization cost Interest expense! Interest income Total net interest expense Income / (loss) from continuing operations Income taxes Net income / (loss) from continuing operations (427.0) (680.9) 605.7 (173.4) (12.6) (4.9) (73.9) (161.7) 179.2 n/a 10.5% (110.9) (129.4) 0.3 (129.1) (60.8) 19.5 (80.3) 2015E $1,720.0 0.4% (435.6) (691.6) 592.8 (169.4) (10.0) (5.0) (73.5) (159.6) 175.3 -2.2% 10.2% 0.0 (125.5) 0.3 (125.2) 50.1 75.8 (25.7) 2016E 2017E 2018E $1,730.0 $1,780.0 $1,840.0 0.6% 2.9% 3.4% (439.6) (453.8) (471.1) (661.7) (664.2 (675.2) 628.8 662.0 693.7 (169.3) (168.3) (165.8) (17.5) 0.0 0.0 (5.0) (5.0) (5.0) (76.8) (71.2) (69.5) (157.7) (157.7 (156.7) 202.5 259.8 296.7 15.5% 28.3% 14.2% 11.7% 14.6% 16.1% 0.0 0.0 0.0 (111.8) (93.1) (69.8) 0.3 0.3 0.3 (111.5) (92.8) (69.5) 91.0 166.9 227.2 62.9 84.6 90.9 28.1 82.3 136.3 Cash Flows Net income / (loss) Add: Noncash items, net Less: Increases in cash prepublication expenditures Less: Net change in working capital Less: Increases in propery, plant, and equipment Cash available to pay down debt (80.3) 409.0 (169.7) (29.5) (86.3) 43.2 (25.7) 402.5 (171.1) 16.9 (70.5) 152.1 28.1 403.8 (167.1) 15.9 (73.4) 207.3 82.3 397.2 (166.7) 16.2 (69.7) 259.3 136.3 392.0 (163.7) 17.5 (65.3) 316.8 Debt balance 1,437.5 1,394.3 1,242.2 1,034.9 775.6 458.8 Based on an assumed weighted average interest rate of 9% and debt balance at the end of the prior year. Income taxes appear disproportionately high due to reduction of certain tax attributes as a result of bankruptcy. Management projections assume that available cash is used to retire the company's debt. Starting debt is 2.3% midrange EBITDA of $625 million. Data sources: Cengage management projections are from the disclosure statement filed October 3, 2013, and have been modified and simplified in parts by the case writers. 3 Important additional assumptions: Assume Cengage exits bankruptcy on June 30, 2013 Tax payments reflect non-interest tax shields and tax liabilities The company has a tax rate of approximately 40%; non-interest tax shields and liabililities will not continue after June 30, 2018 Long term treasury rate 3.0% Market risk premium 6.5% Unlevered beta 1.2 Assumed long term growth rate (2019 +) 3.5% The cost of debt of the restructured firm is approximately 9% All $ are in millions