You are a financial analyst at SilverBaggs, 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 valuation.

Mississippi Partners is interested in buying Pacific Snacks, publicly traded firm. They have asked SilverBaggs to conduct a valuation of Pacific Snacks. Pacific Snacks has enjoyed low but consistent growth. Mississippi Partners believes they can improve margins by better pricing, improve asset management, and increase sales by a wider geographical distribution.

SilverBaggs believes a tax rate of 30% would be appropriate. It is the firm's policy to use a 7 times EBITDA multiple in calculating terminal value for FCF. The terminal value of tax savings is calculated using the perpetuity method. Long term growth after the initial five year period is assumed to mirror economic growth at 4%. Currently, Pacific Snacks pays a 5% interest rate on its debt. Pacific Snack does not pay a dividend. Econometric studies suggest the current risk free rate is 2%, while the market risk premium is 5%. Because this will be financed using debt, and they expect equity to rise quickly, SilverBaggs management has indicated to the intern to assume a target 100% debt-to-equity ratio.

Scoring: Correctly identifying error 1?2 credit, proper correction 1?2 credit (remember you do not calculate the correction), misidentifying error