You are interested in purchasing the Value Group, a local business that has caught your eye. You would like to buy them as of January 1, 2022. The company has provided you with their historical income statement and balance sheet which is included below and on Canvas. The companys CFO told you that they expect they can increase sales by 15% per year for the next four years (2022-2025) after which time sales will grow by 4% per year forever. You expect that after 2026, free cash flows will increase by 4% per year forever. The company will need to maintain property plant and equipment to sales of 24% in the future and depreciation will be constant at 210,000 per year. The companys net working capital to sales is expected to remain at 19.8% in the future. The companys COGS/Sales has been steady at 60% for years and you expect that to stay constant going forward. The companys SG&A / Sales ratio has been 20% per year and the company believes it will keep the same SG&A/Sales ratio going forward.

You are interested in the company because you think you can run the company more efficiently. You believe you can increase sales growth to 25% per year for the next four years (2022-2025) after which time sales will grow by 4% per year forever (and after 2026, free cash flows will still increase by 4% per year forever). You also believe that some of the administrative functions can be improved which should lower your SG&A/Sales ratio from 20% in 2021 to 18.25% in 2022 and then to 17 % in 2023 and all years thereafter. You expect all other elements of your forecasts will be the same as for the Value Group. Quickenal and TMI Enterprises operate in the same industry as the Value Group. Your friends tell you to calculate the appropriate discount rate for Value Group by looking at these two companies. Value Group is 100% equity financed and would be 100% equity financed if you acquired them. Assume all cash flows come at the end of the year and the tax rate is 21%. You know you need to determine how much the Value Group is worth. You are particularly interested as to:

(1) how much the Value Group is worth under its current leadership, (2) how much the Value Group is worth to you, and (3) how much do you think you should bid for the company?

Figure 1. Value Group Financials Income Statement (in thousands) 2019 2020 Sales 1,300 1,690 Sales Growth 25.0% 30.0% - Cost of Goods Sold 779 1,015 = Gross Profit 521 675 Gross margin 40.1% 39.9% - SG&A 108 137 SG&A/Sales 20.7% 20.3% - Depreciation 210 210 = Operating Profit 203 328 - Taxes 63 72 Tax Rate 31.0% 22.0% = Net Income 140 256 Net Profit Margin 10.8% 15.1% Selected Balance Sheet Items (in thousands) 2019 2020 Net Working Capital 257 335 NWC Includes Cash 26 34 Inventory 143 186 Accounts Receivable 182 237 Accounts Payable 94 Property Plant and Equipment 312 406 Figure 2. Market Data Companies Comparable to Value Group Equity Beta Debt Beta Quickenal 1.42 0.16 TMI Enterprises 1.52 0.28 Bond Data U.S. Government 30 year bond Market Risk Premium 2021 2,080 23.1% 1,249 831 40.0% 168 20.2% 210 453 95 21.0% 358 17.2% 2021 412 42 229 291 150 499 122 Equity Value Debt Value 500 100 600 200 1.85% 5.50% Figure 1. Value Group Financials Income Statement (in thousands) 2019 2020 Sales 1,300 1,690 Sales Growth 25.0% 30.0% - Cost of Goods Sold 779 1,015 = Gross Profit 521 675 Gross margin 40.1% 39.9% - SG&A 108 137 SG&A/Sales 20.7% 20.3% - Depreciation 210 210 = Operating Profit 203 328 - Taxes 63 72 Tax Rate 31.0% 22.0% = Net Income 140 256 Net Profit Margin 10.8% 15.1% Selected Balance Sheet Items (in thousands) 2019 2020 Net Working Capital 257 335 NWC Includes Cash 26 34 Inventory 143 186 Accounts Receivable 182 237 Accounts Payable 94 Property Plant and Equipment 312 406 Figure 2. Market Data Companies Comparable to Value Group Equity Beta Debt Beta Quickenal 1.42 0.16 TMI Enterprises 1.52 0.28 Bond Data U.S. Government 30 year bond Market Risk Premium 2021 2,080 23.1% 1,249 831 40.0% 168 20.2% 210 453 95 21.0% 358 17.2% 2021 412 42 229 291 150 499 122 Equity Value Debt Value 500 100 600 200 1.85% 5.50%