Question
In: Finance
You have married into a family business and you are in charge of the finances. Your...
- 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:
- 2020 free cash flow: $800,000 - 2020 EBIT: $1.0MM
- 2021 free cash flow: $840,000 - 2020 Earnings: $550,000
- 2022 free cash flow: $882,000 - Total debt: $1MM
- Annual FCF growth after 2022: 5% - 2020 Depreciation: $200,000
- Company WACC (discount rate): 12%
- Liquidation value of assets: $12.3MM
- 2020 accounts payable: $300,000
- Overall PE ratio for similar companies: 20x
- EV / EBITDA multiple that similar companies have sold for: 10x
Please develop an equity valuation for the business using the free cash flow valuation method. Please also provide three additional equity valuations, using other methods.
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Expert Solution
| Given : Terminal growth rate =5% |
| WACC=12% |
| Total Debt=$1MM |
| Equity Valuation by FCF Method |
| projected | ||||
| Current Year | Horizon Year P | Terminal Year | ||
| Let us find the Projected FCF : | Year 2020 | Year 2021 | Year 2022 | Year 2023 |
| Free Cash flow | 840,000 | 882,000 | 926,100 | |
| Terminal value of FCF at Year 2022 end =926100/(12%-5%) | 13,230,000 | |||
| Total Future FCF+Terminal value | 840,000 | 14,112,000 | ||
| PV Factor @12%=1/1.12^n | 0.8929 | 0.7972 | ||
| PV of FCF & Terminal FCF | 750,000 | 11,250,000 | ||
| Sum of PV of FCF6+Terminal FCF=EV= | 12,000,000 |
| So Enterprise value in 2020= | $ 12,000,000.00 |
| Less Debt value | $ 1,000,000.00 |
| Equity Value = | $ 11,000,000.00 |
| Equity Valuation Other methods : | |
| Method 1. EV/EBIDTA=10x | |
| Given : EBIT in 2020 | $ 1,000,000.00 |
| Add Depreciation | $ 200,000 |
| 2020 EBITDA = | $ 1,200,000.00 |
| EV =10*EBITDA = | $ 12,000,000.00 |
| Less : Debt = | $ 1,000,000.00 |
| Equity Value = | $ 11,000,000.00 |
| Method 2. | |
| PE Ratio in 2020=20x | |
| Net Earning in 2020= | $ 550,000.00 |
| Equity Value =Net Earning*20= | $ 11,000,000.00 |
| Method 3. | |
| Liquidation Value of Assets | $ 12,300,000 |
| Less Balue of Debt | $ 1,000,000 |
| Less Accounts Payable | $ 300,000 |
| Equity Value = | $ 11,000,000 |
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