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)


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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

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