Valuing an Entity with Buy-Manage-Sell Model -- Value to all Stakeholders $200.00 MM 70% D/(D+E) Introduction Just Q Tips (JQT) is a profitable, debt free entity, operating in steady-state forever. Despite this, the economy is in recession, which has depressed the price of JQT's stock. Your Equity/Debt investor team is considering buying it and restructuring its debt. The asking price for 100% of the firm's stock is: Your team believes that an optimal capital structure for the firm would be: If your team proceeds with the Just Q Tips transaction: - The equity investors will pay (1-D)/(D+E)% of the purchase price from their own funds. - Just Q Tips will take out a long-term loan at the moment of close, provided by the debt investors on the team, to pay the current owners the rest of the purchase price. - The equity investors will operate Just Q Tips in its recapitalized steady-state for three years. - At the end of this time: 100% of the stock will be resold for an estimated and the loan will be terminated. (Principal will be repaid). $72.0000 MM Existing As purchased $200.0 $200.0 Financing Structure PP(D+E) = D + E = CAPtot = Market's view of Enterprise Value D/(D + E) = WD D 70.0% 0.0% $0.0 $200.0 a E b Key Rates Income Tax rate Existing As purchased 35.000% 35.000% 7.000% 10.000% re 4.800% 7.530% rwacC 4.800% 6.80900% Free Cash Flows FCF (D+E) = NOPAT - A Working Capital + Deprec - CAPX Partial Income Statement, NOPAT and FCFs ($MM UON) Revenue - Depreciation - Other Expenses = EBIT - Tax on EBIT = NOPAT Existing D = $0.0 $100.00 ($60.00) ($30.00) $10.00 ($3.50) $6.50 As Purchased $100.00 ($60.00) ($30.00) $10.00 d ? - A Working Capital + Depreciation ? $0.00 $60.00 ($60.00) $6.50 - CAPX ? = FCF (D+E) ? Question 1 1 pts What is quantity a? Question 2 1 pts What is quantity b? Question 3 1 pts What is the absolute value of quantity c? Question 4 1 pts What is quantity d? Question 5 1 pts Which two statements are true about JQT's post-purchase Free Cash Flow to D and E? Choose one assertion and one reason for it. It is the same value as NOPAT It is larger than NOPAT It is smaller than EBIT - Tax on Ebit It is growing rapidly Because the firm is operating in a steady-state Because the firm has a high tax rate Because the firm is in a commodity industry U Because the economy is doing well