You are a financial analyst at GreenRock, a major investment banking firm. Your supervisor has just handed you a difficult assignment. You must review the work of an intern, who after given the pro forma income statement and pro forma balance sheet was asked to prepare a valuation. This intern is known to make at least 10 mistakes on each valuation attempted. Your boss wants you to identify those specific errors, suggest how they should have been done but do NOT calculate the correction, nor challenge the assumptions underlying the pro forma statements.

Grokster Energy is interested in buying SunGas, a publicly traded firm. They have asked GreenRock to conduct a valuation of SunGas which has a promising new technology but needs funds. GreenRock believes a tax rate of 20% would be appropriate. It is the firm's policy apply a 6 times multiple of EBITDA in calculating terminal value for FCF. The terminal value of tax savings is calculated using a 5 times multiple method. Long term growth after the initial five year period is assumed to be 8%. SunGas pays a 8% interest rate on its debt. SunGas does not pay a dividend. Econometric studies suggest the current risk free rate is 2%, while the market risk premium is 4%. Assume a 5% control premium.

Scoring: Correctly identifying error credit, proper correction credit (remember you do not calculate the correction), misidentifying error credit. Note that rounding is NOT an error. Each error is worth 4.5 points up to a total of 45 points.

Exhibit 1: Pro Forma Income Statement

	Yr 1	Yr 2	Yr 3	Yr 4	Yr 5
Gross Sales	800	928	1067	1174	1291
Cost of Sales	304	353	405	446	491
Gross Profit	496	575	662	728	800
SGA (Incl.R&D)	180	189	198	208	219
Depr	45	50	57	63	71
Operating Income	271	336	407	457	510
Interest expense	16	14	13	11	10
Taxes	51	64	79	89	100
Net Income	204	258	315	357	400

Exhibit 2: Pro Forma Balance Sheet (Millions)

	0	1	2	3	4	5
Cash	50	207	415	676	979	1323
NWC	72	83	95	110	123	135
PPE	160	176	194	213	234	258
Debt	200	180	160	140	120	100
Equity	82	286	544	859	1216	1616

Exhibit 3: Information from Comparable Companies & Beta Calculations

	Sales (millions)	Tax Rate	D/E	Levered Beta	Unlevered Beta Calculated
BioGas	1200	0.250	.14	1.30	1.18
H2 Gas	690	0.400	.07	0.85	0.82
Texas Gas	2103	0.200	.10	1.20	1.11
CalGas	1700	0.250	.24	1.10	0.93
Average		0.280			1.01

Exhibit 4: Cost of Equity Calculation

4% +1.01 * 2% = 6.02%

Exhibit 5: Debt

Yr 1 Yr 2 Yr 3 Yr 4 Yr 5 Beg Debt 200 180 160 140 120 Payments 20 20 20 20 20 End Debt 180 160 140 120 100

Exhibit 6: Subsidiary Schedules

		1	2	3	4	5
Depreciation Calculation
EBITDA		226	286	350	394	439
-EBIT		271	336	407	457	510
Depreciation		45	50	57	63	71
Cap Ex Calculation
Beg Net PPE		160	176	194	213	234
End Net PPE		176	194	213	234	258
Depreciation		45	50	57	63	71
CapEx		61	68	76	84	95
FCF/DCF Calculation
EBITDA		226	286	350	394	439
+Interest		16	14	13	11	10
-Principal Pmt		20	20	20	20	20
-Tax		45	50	57	63	71
+CapEx		61	68	76	84	95
-Chg NWC		155	178	205	233	258
FCF		83	113	144	157	178
DIscount Factor		.943	.888	.836	.787	.742
DCF (including TV 73/.742)	924	88	127	172	199	240
Tax Shield Cash Flow Calculation
Interest Expense		16	14	13	11	10
Interest Tax Shield		3.2	2.8	2.6	2.2	2
TV						10
Present Value Factor		.940	.883	.830	.780	.733
PV	25	3.2	2.5	2.2	1.7	15.1
-Control Premium	47
Enterprise Value	902
-(Debt +Cash)	50
Equity Value	852