Valuing an Entity with Buy-Manage-Sell Model 10.75 Introduction Company ZED is a profitable, debt free entity, operating in steady-state forever. Despite this, the economy is in recession, which has depressed the price of ZED's stock. Your PE firm is considering buying ZED at the asking price of: $200 MM This corresponds to a PE ratio of: Your firm believes that an optimal capital structure for the firm would be: 30% D/(D+E) If your firm buys company ZED: You will pay (1-D/(D+E))% of the purchase price with your firm's funds. Have the firm take out a loan at the moment of close, to pay the current owners the rest of the purchase price. Your firm will operate company ZED in its recapitalized steady-state for three years. - You will sell ZED at the end of this time, when you believe the entity's PE ratio will have recovered to a more normal value of: 13.9785 Given Constants PRE 4.00% Bu . 8.00% 1.3000 1.6454 Financing Structure D+E = CAP Tot D/D+E) = Wo D E Existing As purchased $200 $200.0 0.0% 30.0% $0.0 $200.0 Key Rates Existing As purchased 7.00% 8.00% 9.20% 10.58% 38.00% TE Income Tax rate Free Cash Flows FCF Income Statement Revenue Depreciation Other Expenses = EBIT -Interest - Tax = NI Existing D = $0.0 $150.00 ($80.00) ($40.00) $30.00 $0.00 ($11.40) $18.60 As Purchased $150.00 ($80.00) ($40.00) $30.00 - A Working Capital + Depreciation $0.00 $80.00 $98.60 $0.00 $80.00 = CF operations, CAPX + A Debt = FCF ($80.00) $0.00 $18.60 ($80.00) $0.00 Valuation at T=0 NPVE = -Pp, E +FCFE,i/ (1+re)" + Sp. E/ (1+r)" Pp,E= FCFE = Computed above Sp.E= NPVE = Notes: I'd listed above is pre-tax. (Always assume this unless otherwise instructed). Question 1 Assuming your firm purchases Company ZED, what is the amount loan that Company ZED will take out at the time of purchase? Report your answer to two decimal places. 140 Question 2 Why did Company ZED take out this loan? To partially pay the the amount required to purchase the firm from its existing owners. To provide cash for the new owners to withdraw as dividends. To payoff the firm's existing debt. Not enough information is provided to answer this question The loan was taken out inappropriately. My PE firm should have taken out the loan. Question 3 How much ED's purchase price will your PE firm from its own funds? Report answer to two decimal places 140 Question 4 What is the absolute value of the annual interest expense of the recapitalized Company ZED? Recapitalized means as-purchased, with the new loan in place. Report your answer to two decimal places. 17.11 Question 5 What is the absolute value of the annual tax expense of the recapitalized Company ZED? 16.644 Question 6 What is the annual net income of the recapitalized Company ZED? Report your answer to 4 decimal places. Question 7 What is the annual Free Cash Flow to Owners (shareholders) of the recapitalized Company ZED? Report your answer to 4 decimal places. Question 8 What is your expected Sales Price for Company ZED? Question 9 What is the NPV for the project "should we purchase Company ZED, given all the information compiled above?" Report your answer to two decimal places. Question 10 Should your firm purchase Company ZED and recapitalize it as envisioned above? O No Not enough information is provided to answer this question. Yes Question 11 Why or why not? Because this is a positive NPV project o Because the payback period is too long. Because the payback period is less than three years. Not enough information is provided to determine a reason. Because this is a negative NPV project Valuing an Entity with Buy-Manage-Sell Model 10.75 Introduction Company ZED is a profitable, debt free entity, operating in steady-state forever. Despite this, the economy is in recession, which has depressed the price of ZED's stock. Your PE firm is considering buying ZED at the asking price of: $200 MM This corresponds to a PE ratio of: Your firm believes that an optimal capital structure for the firm would be: 30% D/(D+E) If your firm buys company ZED: You will pay (1-D/(D+E))% of the purchase price with your firm's funds. Have the firm take out a loan at the moment of close, to pay the current owners the rest of the purchase price. Your firm will operate company ZED in its recapitalized steady-state for three years. - You will sell ZED at the end of this time, when you believe the entity's PE ratio will have recovered to a more normal value of: 13.9785 Given Constants PRE 4.00% Bu . 8.00% 1.3000 1.6454 Financing Structure D+E = CAP Tot D/D+E) = Wo D E Existing As purchased $200 $200.0 0.0% 30.0% $0.0 $200.0 Key Rates Existing As purchased 7.00% 8.00% 9.20% 10.58% 38.00% TE Income Tax rate Free Cash Flows FCF Income Statement Revenue Depreciation Other Expenses = EBIT -Interest - Tax = NI Existing D = $0.0 $150.00 ($80.00) ($40.00) $30.00 $0.00 ($11.40) $18.60 As Purchased $150.00 ($80.00) ($40.00) $30.00 - A Working Capital + Depreciation $0.00 $80.00 $98.60 $0.00 $80.00 = CF operations, CAPX + A Debt = FCF ($80.00) $0.00 $18.60 ($80.00) $0.00 Valuation at T=0 NPVE = -Pp, E +FCFE,i/ (1+re)" + Sp. E/ (1+r)" Pp,E= FCFE = Computed above Sp.E= NPVE = Notes: I'd listed above is pre-tax. (Always assume this unless otherwise instructed). Question 1 Assuming your firm purchases Company ZED, what is the amount loan that Company ZED will take out at the time of purchase? Report your answer to two decimal places. 140 Question 2 Why did Company ZED take out this loan? To partially pay the the amount required to purchase the firm from its existing owners. To provide cash for the new owners to withdraw as dividends. To payoff the firm's existing debt. Not enough information is provided to answer this question The loan was taken out inappropriately. My PE firm should have taken out the loan. Question 3 How much ED's purchase price will your PE firm from its own funds? Report answer to two decimal places 140 Question 4 What is the absolute value of the annual interest expense of the recapitalized Company ZED? Recapitalized means as-purchased, with the new loan in place. Report your answer to two decimal places. 17.11 Question 5 What is the absolute value of the annual tax expense of the recapitalized Company ZED? 16.644 Question 6 What is the annual net income of the recapitalized Company ZED? Report your answer to 4 decimal places. Question 7 What is the annual Free Cash Flow to Owners (shareholders) of the recapitalized Company ZED? Report your answer to 4 decimal places. Question 8 What is your expected Sales Price for Company ZED? Question 9 What is the NPV for the project "should we purchase Company ZED, given all the information compiled above?" Report your answer to two decimal places. Question 10 Should your firm purchase Company ZED and recapitalize it as envisioned above? O No Not enough information is provided to answer this question. Yes Question 11 Why or why not? Because this is a positive NPV project o Because the payback period is too long. Because the payback period is less than three years. Not enough information is provided to determine a reason. Because this is a negative NPV project