firm valuation question
TRANSCRIPT
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8/9/2019 Firm Valuation Question
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For the valuation of a Company from its Income Statement and Balance Sheet, what we ne
Assets 2008 2009
Cash and marketable securities 11492
Short Term Investment 962Accounts receivable 6130
Notes Receivable 15
Other Receivable 2917
Inventories 8490
Prepaid Expense 12
Other Current Assets 36
Total current assets 30054
Gross plant and equipment 7162 7408
Accumulated Depriciation 4881 5073
Net plant and equipment 2281 2335Loan Receivable ,LT 54
Deffered Tax Asset, LT 280 180
Other Long Term Asset 16 19
Total assets 32642
Liabilities and equity
Accounts payable 16484
Accrued Expense 1042
Current Income Tax Payable 1690
Other current liabilities 442Total current liabilities 19658
Pension and Other Benefits, LT 237
Total Liability 19895
Common stock 666
Retained earnings 12066
Comprehensive Income and Other 15
Total common equity 12747
Total liabilities and equity 32642
Revenues 80894 91,327
CGS 75895 85,121
GP 4999 6,206
Selling and Admin Expense 645 628
Other Operating Expense -419 273
Operating Income (EBIT) 4772 5305
Additional Information:
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8/9/2019 Firm Valuation Question
2/23
1- The company is expecting to grow its sales to grow 25% in first year, 15% in second year and 4% there after.
2- Long term Government bond is trading at 11%.
4- Last year EPS is 10.5
Required
Estimate Future Free Cash Flow
Value of Operation and Value of Entreprise.Find out market price per share.
3-Market risk premiun and market risk is 4% and 1.5 respectively.
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8/9/2019 Firm Valuation Question
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8/9/2019 Firm Valuation Question
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8/9/2019 Firm Valuation Question
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iabiltiy for calculating NOWC, Balance Sheet Fixed Asset to calculate NCE and Long Term L
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8/9/2019 Firm Valuation Question
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8/9/2019 Firm Valuation Question
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iability side for valuing the firm.
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8/9/2019 Firm Valuation Question
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8/9/2019 Firm Valuation Question
9/23
We will use % of Sale method to project future values, Remenber that Current Asset and
Fixed assets are projected with historical method. Non operating activities will not be proj
Assets % 2008 2009 2010 2011
Cash and marketable securities 12.583 11492 14,365 16,520
Short Term Investment 962 962 962
Accounts receivable 6.712 6130 7,663 8,812Notes Receivable 0.016 15 19 22
Other Receivable 3.194 2917 3,646 4,193
Inventories 9.296 8490 10,613 12,204
Prepaid Expense 0.013 12 15 17
Other Current Assets 0.039 36 45 52
Total current assets 30054 37,327 42,782
Gross plant and equipment 7162 7408 7,662 7,926
Accumulated Depriciation 4881 5073 5,272 5,479
Net plant and equipment 102.37 2281 2335 2,390 2,447
Loan Receivable ,LT 54 54 54Deffered Tax Asset, LT 0.2 280 180 116 74
Other Long Term Asset 0.02 16 19 23 27
Total assets 32642 39,910 45,384
Liabilities and equity
Accounts payable 18.05 16484 20605 23,696
Accrued Expense 1.14 1042 1,303 1,498
Current Income Tax Payable 1.85 1690 2,113 2,429
Other current liabilities 0.48 442 553 635
Total current liabilities 19658 24,573 28,258Pension and Other Benefits, LT 237 237 237
Total Liability 19895 24,810 28,495
Common stock 666 666 666
Retained earnings 12066 12066 12066
Comprehensive Income and Other 15 15 15
Total common equity 12747 12,747 12,747
Total liabilities and equity 32642 37,557 41,242
Revenues 91,327 114,159 131,283
CGS 93.20 85,121 106,401 122,361
GP 6,206 7,758 8,921
Selling and Admin Expense 0.69 628 785 903
Other Operating Expense 0.30 273 341 392
Operating Income 5305 6,631 7626
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8/9/2019 Firm Valuation Question
10/23
To calculate NOPAT we will use the formula EBIT(1-t), where t is the tax rate. We can assume tax rate to be 40% or 35% o
NOPAT= EBIT(1-t) 3,183 3,979 4,576
NOWC calculation: Operating Current asset - Operating Current Liability ( I repeat OPERA
NOWC 9434 11,793 13,561
TO calculate NCE we will add up all the operating fixed assets. Net PP&E, Deffered Tax an
NCE 2534 2,529 2,548
Simply subtract new from old value.
change in NOWC 2,359 1,769
change in NCE (5) 19
FCF= NOPAT +- change in NOWC +- change in NCE
If the change is positive we will substract it from NOPAT and vice versa.
FCF 1,626 2,787
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8/9/2019 Firm Valuation Question
11/23
urrent Liabilities are always projected with % of Sale method.
ected but written as it is.
2012
17,181
962 non operating
9,16422
4,361
12,693
18
54
44,455
8,198
5,693
2,505
54 non operating48
32
47,093
24,644
1,558
2,527
661
29,389237
29,626
666
12066
15
12,747
42,373
136,534
127,256
9,278
939
408
7931
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8/9/2019 Firm Valuation Question
12/23
r we will find it by (Income tax expense/operating income*100) formula. Here we will assume tax rate to be 40%.
4,759
ING)
14,104
d Other Long Term Asset in this case.
2,584
542
36
4,180
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8/9/2019 Firm Valuation Question
13/23
To calculate NOPAT we will use the formula EBIT(1-t), where t is the tax rate. We can assu
NOPAT= EBIT(1-t) 3183.02 3978.78 4575.59 4758.62
NOWC calculation: Operating Current asset - Operating Current Liability ( I repeat OPERATI
NOWC 9434 11792.5 13561.38 14103.83
TO calculate NCE we will add up all the operating fixed assets. Net PP&E, Deffered Tax an
NCE 2534 2528.56 2548.05 2584.43
Simply subtract new from old value.
change in NOWC 2,359 1,769 542
change in NCE (5) 19 36
FCF= NOPAT +- change in NOWC +- change in NCE
If the change is positive we will substract it from NOPAT and vice versa.FCF 1625.72 2787.23 4179.78
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8/9/2019 Firm Valuation Question
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e tax rate to be 40% or 35% or we will find it by (Income tax expense/operating income*
ING)
Other Long Term Asset in this case.
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8/9/2019 Firm Valuation Question
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00) formula. Here we will assume tax rate to be 40%.
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8/9/2019 Firm Valuation Question
16/23
TO find WACC we need following Parameters from Balance Sheet
We Wd Wpre
Ke Kd Kpre
Tax
Total Capital= Equity + Debt = (Common Stock + Retained Earning + Comprehinsive Inco
In this case company do not have debt in its capital structure.
= 666 + 12066 + 14
= 12745
We = total Equity / Total Capital*100
= 12745/12745*100= 100%
Wd = Total Debt / Total Capital *100
= 0/12745 * 100
= 0%
Ke = Risk Free Rate + Martet Risk Premium * Market Risk ( Beta)
= 11 % + 4% * 1.5
= 17%
Kd = 0
To find cost of debt we divide interest expense by by total debt but in this particular probl
Kpre = 0
Wpre= 0
Company did not have prefered stock in its capital structure.
So, the WACC will be
WACC = Kd*Ke (1-t) + Ke * Kd + Kpre * Wpre
= 0 + 17 % + 0
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8/9/2019 Firm Valuation Question
17/23
= 17%
the WACC of the company is 17%
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8/9/2019 Firm Valuation Question
18/23
me nd Other) + Debt
m we do not have debt so its cost will be zero.
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8/9/2019 Firm Valuation Question
19/23
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8/9/2019 Firm Valuation Question
20/23
Now we will move to next step which is firm valuation.
Value of the firm has two components
1- Value of Operations
2- Value of Non-Operations
1- Value of Operations
where terminal value =
Now value of the operations
= 26913
Value of the firm = Value of operating activities + Value of non operating activities
= 26913+(962+54)
= 27929
Market Value of Equity = Value of firm + Value of Debt
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8/9/2019 Firm Valuation Question
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= 27929 + 0
= 27692
Market Price Per Share = MVE/No. of Shares
= 27962/500
= 60
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8/9/2019 Firm Valuation Question
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= 33438
- any long term non operating liability
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8/9/2019 Firm Valuation Question
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- 237 (pension)