Question

• 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.

Answer 1

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