This is 2023. When Matt concocted his cleaning compound, some twenty years ago, all that his wife, Edith, and he were trying to do was to come up with a sweeter, gentler, yet tougher, cleaning product. Little did he realize that someday he would be the proud owner of a multi-million dollar firm debating whether or not to sell stock to the public. After having peddled vacuum cleaners and floor wax products at state fairs and trade shows throughout the Midwest, Matt and Edith Short realized that there was a dire need for a cleaning and polishing product that was free from harsh chemicals, environmentally friendly, and tough on dirt and grime. So Matt spent many hours in his garage at their country home in Appleton, Wisconsin, experimenting with various oils, cleansing agents, and extracts until he finally came up with what he proudly calls, "The perfect cleaner and polish." It was the pure citrus oil made from the peels of Valencia oranges that did the trick. Not only was the mixture sweet smelling, but it was also an effective solvent and degreaser that worked wonders on their kitchen cabinets at home. So spurred on by their close friends, the Shorts formed their company, Citrus Glow (which they later changed to Citrus Glow International), in December of 1994 and took their dog and pony show on the road. Initially, they sold their products mainly through "word of mouth" advertising at state fairs, and home and garden shows, but later, with the help of their three children, Dan, Joe, and Lisa, they used direct response television, direct mail, and e-commerce channels to help grow the company's revenues at a phenomenal rate. When the Home Shopping Network agreed to let them show off their merchandise about five years ago, major retailers like Wal-Mart and Costco took notice and started stocking Citrus Glow products on their shelves. Within twenty years, their sales had grown to over $500 million and their production facilities were beginning to feel the strain. Their product line had expanded to include air fresheners, soap bars, liquid soaps, spot removers, and a variety of cleaning tools. Through all this success, the Shorts always focused on customer needs and satisfaction, always encouraging their customers to provide them with feedback and testimonials. Their latest addition, i.e. an industrial-strength cleanser and wood protector, seemed to be gaining wide acceptance both in the United States and overseas. Matt, who was nearing 75 years of age, knew that they would need to raise significant amounts of capital if they wanted to keep growing and expanding their product line. Still 1 regarding the possibility of going public by issuing an initial public offering (IPO). Lisa and Joe strongly supported the idea because they felt that with competitors coming up with substitute products, they needed to stay ahead of the game. Dan, on the other hand, disagreed and recommended that they outsource the production and concentrate on their marketing efforts. He preferred that the firm stay private, thereby, relying less on external capital and retaining control. After carefully weighing all the factors, Matt decided to explore the possibility of raising the money via an IPO. "Dan, Lisa, and Joe," he said, "the three of you have MBAs from some of the most prestigious business schools in the country. I'm sure you guys can figure out WHAT WE ARE REALLY WORTH! I hate to depend totally on the investment banking folks to come up with the right price. Why don't the three of you put your heads together and figure out what is the minimum price that we should sell our stock for if we were to go public? Let's say we sell 30 million shares. I'm sure we can find a way of retaining control of a large portion of the shareholding and still raise the much-needed cash. Dan's point of loss of control is a good one, but I am not in favor of outsourcing production. Our success has come from our quality and that would likely be jeopardized if we let others produce the product." So Dan, Joe, and Lisa got to work. They realized that they would need industry and competitors' financial data. Table 1 presents key valuation data for three of their major publicly traded competitors in the personal and household products industry sector. Tables 2 and 3 present Citrus Glow International's 3-year income statements and balance sheets, respectively. Having worked on various valuation projects for a major consulting firm, Dan was a strong advocate of the use of the comparables approach for valuing common stock. His method involved using price-earnings and price-sales ratios of comparable firms in conjunction with current values for the firm's earnings and sales, respectively. Joe's old finance professor, Dr. Larry Brown, on the other hand, had indoctrinated him in the art of common stock valuation via discounting future dividends. "Use multiple-stage growth rate scenarios in conjunction with industry benchmarks, when valuing growth companies." was Dr. Brown's advice. Accordingly, John decided to use a multiple-stage growth model to value the firm's equity. Lisa preferred to use the free cash flow model whereby the firm's total value was estimated as the sum of its discounted free cash flows. Free cash flows were estimated by subtracting the firm's net capital spending and change in net working capital from the year's operating cash flows and were discounted at the firm's overall cost of capital (or the weighted average cost of capital). Lisa based her calculation on the free cash flows in 2022. She assumed that the firm's free cash flows would grow at a rate of 30% during the first year, 20% during the second year, and finally settle down to a long-term growth rate of 6% after that. The firm's market value of equity was calculated by subtracting the firm's outstanding debt owed to creditors (i.e., long-term debt) from the overall firm value. Since their debt is not traded in the market, she used the book value of the debt. "What will we do if our three estimates are totally different?" asked Lisa, looking rather concerned. "We'll have to go back to the drawing table and examine our inputs," said the everresourceful Dan, "We'll each have to be within a reasonable ballpark, or Dad's going to flip!" Please answer the following questions. Please submit your answers in Word or pdf file. Your mav include your calculations in Excel file as a supplement. Please make it clear how you get your answer in order to ensure partial credit. 1. What are the advantages and disadvantages of going public? Do you agree with Dan's concerns, or do you concur with the other members of the Short family regarding the issuance of an IPO? Explain why. 2. Dan used their 2022 earnings and sales, to be consistent with the ways the price ratios were calculated for competitors. If Dan took the average price from estimation based on the price-earnings ratio and price-sales ratio, what is Dan's price estimate using the comparables approach? What are the pros and cons of Dan's preferred approach? 3. What is Joe's price estimate if he were to use a 3-stage growth model with growth assumptions of 30% for the first 3 years, followed by 20% for the next two years, and a long-term growth assumption of 6% thereafter? Assume that the firm would pay a dividend of $1.50 per share at the end of the first year after IPO. Joe estimated the required return to be 13.73% and used it to discount dividends. 4. Lisa estimated the company's overall cost of capital (or the weighted average cost of capital) to be 11.81%. Based on her approach of discounted free cash flows, what would Citrus Glow's selling prices per share be if they were to issue 30 million shares? How far off was her estimation from her brothers'? Why? 5. Based on all three estimates, how much per share do you think Citrus Glow is really worth? Explain your rationale. Table 1: Key Valuation Ratios for Top 3 Competitors \begin{tabular}{lccc} \hline & Company A & Company B & Company C \\ \hline Price/Earnings & 23.6 & 24.6 & 22.8 \\ \hline Price/Sales & 2.9 & 2.8 & 2.9 \\ \hline Dividend Yield \% & 1.8 & 1.6 & 1.7 \\ \hline Beta & 1.2 & 1.3 & 1.15 \\ \hline Recent Price & $62.47 & $57.29 & $57.30 \\ \hline \end{tabular} Table 2: Citrus Glow International's 3-year Income Statements \begin{tabular}{lrrr} \hline & 2020 & 2021 & 2022 \\ \hline Revenue & 300,250,000 & 400,150,000 & 500,000,000 \\ COGS (excluding depreciation) & 147,122,500 & 184,069,000 & 255,000,000 \\ Gross Profit & 153,127,500 & 216,081,000 & 245,000,000 \\ Depreciation & 4,206,746 & 7,042,640 & 9,703,125 \\ Operating Expenses & 87,072,500 & 141,653,100 & 140,000,000 \\ Earnings Before Interest \& Taxes & 61,848,254 & 67,385,260 & 95,296,875 \\ Interest Expense & 1,876,865 & 5,165,760 & 8,006,250 \\ Earnings Before Taxes & 59,971,389 & 62,219,500 & 87,290,625 \\ Income Taxes & 23,988,556 & 24,887,800 & 34,916,250 \\ Net Income & 35,982,833 & 37,331,700 & 52,374,375 \\ \hline \end{tabular} Table 3: Citrus Glow International's 3-year Balance Sheet \begin{tabular}{lrrr} \hline & 2020 & 2021 & 2022 \\ \hline Current Assets & 45,573,081 & 57,621,600 & 64,687,500 \\ Fixed Assets & 42,067,459 & 70,426,400 & 97,031,250 \\ Total Assets & 87,640,541 & 128,048,000 & 161,718,750 \\ Current Liabilities & 3,128,108 & 8,609,600 & 13,343,750 \\ Long-term Debt & 12,512,432 & 34,438,400 & 53,375,000 \\ Owners' Equity & 72,000,000 & 85,000,000 & 95,000,000 \\ Total Liabilities and Owners' Equity & 87,640,541 & 128,048,000 & 161,718,750 \\ \hline \end{tabular}