Valuation of Common Stock

What Are We Really Worth?

When Wayne concocted his cleaning compound some $20$ years ago, all that his wife, Corrine, 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 multimillion$-$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, Wayne and Corrine Goodman 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. Wayne spent many hours in his garage at their country home in Chesterton, Indiana, 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, it was an effective solvent and degreaser that worked wonders on their kitchen cabinets at home.

Spurred on by their close friends, the Goodmans formed their company, Orange Brite $($which they later changed to Orange Brite International$)$ in December $1995,$ 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, Kelly, Billy, and Joey, they used direct response television, direct

$38$

mail, and e$-$commerce channels to help grow the company's revenues at phenomenal rate. When the Home Shopping Network agreed to let them pr mote their merchandise about five years ago, major retailers like Wal$-$Ma and Costco took notice and started stocking Orange Brite products on the shelves.

Within $20$ years, sales had grown to over $$500$ million and their prc duction facilities were beginning to feel the strain. Their product line ha expanded to include air fresheners, soap bars, liquid soaps, spot remover and a variety of cleaning tools. Through all this success, the Goodman always focused on customer needs and satisfaction, always encouragin their customers to provide them with feedback and testimonials. Thei latest addition, an industrial$-$strength cleanser and wood protector, seeme to be gaining wide acceptance both in the United States and overseas.

Wayne, who was nearing $75$ years of age, knew that they would neer to raise significant capital if they wanted to keep growing and expanding their product line. Still actively involved in the business, he had asked the rest of his family for their suggestions regarding the possibility of going public by issuing an initial public offering $($IPO$).$ Kelly and Joey strongly supported the idea because they felt that with competitors coming up with substitute products, they needed to stay ahead of the game. Billy, on the other hand, disagreed and recommended that they outsource production and concentrate on their marketing efforts. He preferred that the firm stay private, relying less on external capital and retaining control.

After carefully weighing all the factors, Wayne decided to explore the possibility of raising the money via an IPO. "Billy, Kelly, and Joey," he said, "the three of you have MBAs from some of the most prestigious business schools in the country. I$\text{'}$m sure you guys can figure out what we're really worth! I hate to depend totally on investment bankers 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$\text{'}$m sure we can find a way of retaining control of a large portion of the shareholding and still raise the much$-$needed cash. Billy'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"

Kelly, Billy, and Joey got to work. They realized that they would need industry and competitors' financial data. Table $1$ presents key valuation data for $3$ of their major publicly traded competitors in the personal and household products industry sector. Tables $2$ and $3$ present Orange Brite International's five$-$year income statements and balance sheets, respectively.

Kelly preferred to use the corporate value model, whereby the firm's value was estimated as the sum of its discounted free$-$cash flows. Free cash

Table $2$

Orange Brite International's $5-$year Income Statements

$\backslash$table$[[,2011,2012,2013,2014,2015],[$Revenue$,100,700,000,225,000,000,300,250,000,400,150,000,500,000,000$