Question

You have married into a family business and you are in charge of the finances. Your...

  1. You have married into a family business and you are in charge of the finances. Your father-in-law is considering an IPO and has asked you to come up with estimates for the equity value. Here are the figures you have been able to come up with so far:

    1. 2020 free cash flow: $9.0MM

    2. 2021 free cash flow: $9.8MM

    3. 2022 free cash flow: $10.5MM

    4. Annual FCF growth after 2022: 4%

    5. 2020 EBITDA: $9.5MM

    6. 2020 earnings: $6.0MM

    7. Company WACC (discount rate): 12%

    8. Total debt: $6MM

    9. Overall PE ratio for similar companies: 20x

    10. EV / EBITDA multiple that similar companies have sold for: 10x

    11. Market value of company assets: $75MM

Please develop a free cash flow valuation PLUS two other valuations to estimate the total value of the Equity.  (10 pts)


Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Terminal Value (TV) at Year 2022 = Free cash flow in 2022 x (1+g) / WACC - g

TV 2022 = 10.5*1.04 / 0.12-0.04 = 136.5

Now we will calculte the present value of all the cash flows to calculate value of the firm

Year Particulars Amount PV @ 12%
2020 FCF 9 8.04
2021 FCF 9.8 7.81
2022 FCF 10.5 7.47
2022 TV 136.5 97.16
Value of Firm 120.48

Value of Equity = Value of firm - Value of debt

Value of Equity = 120.48 - 6

Value of Equity = 114.48

Two Other Valuation Estimate

1. Using PE Ratio

Value of Equity = 2020 Earnings x PE ratio of similar companies

Value of Equity = 6 x 20 = 120

2. Using EV / EBITDA

Value of Firm = EBITDA x EV/EBITDA Multipe

Value of Firm = 9.5 x 10 = 95

Value of Equity = Value of Firm - Value of Debt

Value of Equity = 95 - 6 = 89

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
1. You have married into a family business and you are in charge of the finances....
1. You have married into a family business and you are in charge of the finances. Your father-in-law is considering an IPO and has asked you to come up with estimates for the equity value. Here are the figures you have been able to come up with so far: (12 pt.s) a) 2020 free cash flow: $9.0MM b) 2021 free cash flow: $9.8MM c) 2022 free cash flow: $10.5MM d) Annual FCF growth after 2022: 4% e) 2020 EBITDA: $9.5MM...
Using the free cash flow valuation model to price an IPO - Personal Finance Problem    Assume...
Using the free cash flow valuation model to price an IPO - Personal Finance Problem    Assume that you have an opportunity to buy the stock of​ CoolTech, Inc., an IPO being offered for $7.69 per share. Although you are very much interested in owning the​ company, you are concerned about whether it is fairly priced. To determine the value of the​ shares, you have decided to apply the free cash flow valuation model to the​ firm's financial data that​ you've...
Using the free cash flow valuation model to price an IPO Personal Finance Problem: Assume that...
Using the free cash flow valuation model to price an IPO Personal Finance Problem: Assume that you have an opportunity to buy the stock of​ CoolTech, Inc., an IPO being offered for ​$5.15 per share. Although you are very much interested in owning the​ company, you are concerned about whether it is fairly priced. To determine the value of the​ shares, you have decided to apply the free cash flow valuation model to the​ firm's financial data that​ you've accumulated...
Suppose that in the end of January 2020, you have the following financial information about T...
Suppose that in the end of January 2020, you have the following financial information about T Co. : Sales of $518 million EBITDA of $55.6 million Cash of $100 million Debt of $3 million Number of shares 21 million EPS of 1.65 Book value of equity of $12.05 million. Assume that from a list of T Co.'s comparable firms you computed the following information: P / E P / Book Equity EV / Sales EV / EBITDA Average 15.01 2.84...
Please refer to the financial statements provided in Problem 4.  You have forecasted Lunar Motivation Corporation (LMC)...
Please refer to the financial statements provided in Problem 4.  You have forecasted Lunar Motivation Corporation (LMC) free cash flow in 2020 to be $50.51 million, $450 million in 2021, 500 million in 2022, and 550 million in 2023.  After 2023, free cash flow will grow at a constant rate of 7 percent per year forever.  The company has a 14% WACC and 100 million shares of common stock. Please provide an estimate of the items below, including the stock price, using the...
​(This question has two​ parts.) It is 2020. You are investigating the possibility of making an...
​(This question has two​ parts.) It is 2020. You are investigating the possibility of making an equity investment in Walkerville Woodworking​ Inc., a firm that specializes in producing​ antique-style furniture with a modern twist. Your research has revealed the following​ information: ​• Walkerville has​ $8 million in excess cash and​ $4.5 million in debt.​ 
 ​• The company is expected to have free cash flow of​ $26 million in 2021 and​ $32 million in 2022.​ 
 ​• Beyond​ 2022, free cash flow...
You have been tasked with using the FCF model to value Julie’s Jewelry Co. After your...
You have been tasked with using the FCF model to value Julie’s Jewelry Co. After your initial review, you find that Julie’s has a reported equity beta of 1.5, a debt-to-equity ratio of .5, and a tax rate of 21 percent. In addition, market conditions suggest a risk-free rate of 4 percent and a market risk premium of 11 percent. If Julie’s had FCF last year of $47.0 million and has current debt outstanding of $119 million, find the value...
You are recruited by the founder of a start-up company to advise her on the optimal...
You are recruited by the founder of a start-up company to advise her on the optimal capital structure for her company. The sole project of the company will require an initial outlay (at date 0) of £150,000, and is expected to generate a single cash flow in one year (at date 1). The project cash flow at date 1 will take one of two equally likely values depending on the state of the economy: if the economy is strong, then...
Stillwater Energy, a privately held energy company, is going public. You have been hired to recommend...
Stillwater Energy, a privately held energy company, is going public. You have been hired to recommend an IPO price per share for the company. Use the following three companies that operate in the same industry, answer the questions below. Assuming the company’s EBITDA is $150.00 million, use the table below to estimate their enterprise value, and answer all questions. SHOW ALL WORK TO RECEIVE FULL CREDIT FOR CORRECT ANSWERS.                                          Enterprise Value (millions)                                       EBITDA (millions)                                                        EBITDA Multiple Swift...
You have reformulated the Imber Aedax Company’s most recent financial statements and extracted the following information:...
You have reformulated the Imber Aedax Company’s most recent financial statements and extracted the following information: Year ended 31 Dec 2019 $ million Sales 35,200 Interest expense minus interest income 291 Earnings before tax 13,168 Tax expense 2,384 Comprehensive Income (CE) 11,809 As at 31 Dec 2019 $ million Net operating working capital (OWC) 936 Net non-current operating assets (NNCOA) 42,287 Net financial obligations (NFO) 11,906 a) Calculate NOA (net operating assets) and CSE (common shareholders’ equity) at the end...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT