Question

In: Finance

Analysts expect that under new management the firm could increase it revenue and operating expenses by...

Analysts expect that under new management the firm could increase it revenue and operating expenses by 12% next year 10%and the following year 7%. Analysts believe the marginal cost to be 6%, the Wacc 8% and the tax to be 20%.

Assumptions. You must adjust numeric value of each assumption as necessary to project cash flow, income, assets & liabilities, etc.
Valuation. Construct a valuation using a DCF analysis to calculate the Enterprise and Equity Values. Apply an EBITDA multiple of 7 to calculate TV.
Commentary. Your commentary should focus on how much your would pay for this firm and why.
Actual Projected
2018 2019 2020 2021 2022 2023
Total Revenue     47,000.0     51,700.0     56,870.0     62,557.0     68,812.7     75,694.0
   Cost of Revenue     30,000.0     33,000.0     36,300.0     39,930.0     43,923.0     48,315.3
Gross Profit     17,000.0     18,700.0     20,570.0     22,627.0     24,889.7     27,378.7
Operating Expenses
   Depreciation           900.0           636.2           683.2           734.9           791.8           854.3
   S, G & A       7,800.0       8,580.0       9,438.0     10,381.8     11,420.0     12,562.0
   Non-recurring charge           500.0                  -                    -                    -                    -                    -  
Operating Income       7,800.0       9,483.8     10,448.8     11,510.3     12,677.9     13,962.4
   Interest Expense           335.0             30.1             30.1             30.1             30.1             30.1
Earnings before income taxes       7,465.0       9,453.7     10,418.7     11,480.2     12,647.8     13,932.3
   Income Taxes       1,513.0       1,890.7       2,083.7       2,296.0       2,529.6       2,786.5
Net Income       5,952.0       7,563.0       8,335.0       9,184.2     10,118.3     11,145.8
Balance Sheet
All numbers are in millions.
2018 2019 2020 2021 2022 2023
Cash 1,750.0          8,326.8       15,576.9       23,567.7       32,373.3       42,075.3
Receivables 4,097.0          4,506.7          4,957.4          5,453.1          5,998.4          6,598.3
Inventories 4,783.0          5,261.3          5,787.4          6,366.2          7,002.8          7,703.1
Current Assets 10,630.0       18,094.8       26,321.7       35,387.0       45,374.5       56,376.7
Net PPE 6,362.0          6,832.0          7,349.0          7,917.7          8,543.3          9,231.4
Goodwill 1,860.0 1,860.0 1,860.0 1,860.0 1,860.0 1,860.0
Total Assets 18,852.0       26,786.8       35,530.7       45,164.7       55,777.8       67,468.1
Payables 2,888.0          3,176.8          3,494.5          3,843.9          4,228.3          4,651.2
Other Liabilities 830.0             913.0          1,004.3          1,104.7          1,215.2          1,336.7
Long Term Debt 4,224.0          4,224.0          4,224.0          4,224.0          4,224.0          4,224.0
Common Equity 1,762.0          1,762.0          1,762.0          1,762.0          1,762.0          1,762.0
Retained Earnings 9,148.0       16,711.0       25,045.9       34,230.1       44,348.3       55,494.2
Total Liabilities & Equity 18,852.0       26,786.8       35,530.7       45,164.7       55,777.8       67,468.1
Depreciation 636.2 683.2 734.9 791.8 854.3
PPE
Beg       6,362.0       6,832.0       7,349.0       7,917.7       8,543.3
Additions       1,106.2       1,200.2       1,303.6       1,417.4       1,542.4
Depreciation or Disposals           636.2           683.2           734.9           791.8           854.3
End     6,362.0       6,832.0       7,349.0       7,917.7       8,543.3       9,231.4
Debt
Beg       4,224.0       4,224.0       4,224.0       4,224.0       4,224.0
Additions                  -                    -                    -                    -                    -  
Reductions                  -                    -                    -                    -                    -  
End     4,224.0       4,224.0       4,224.0       4,224.0       4,224.0       4,224.0
Interest Calculation
Beg Debt Level       4,224.0       4,224.0       4,224.0       4,224.0       4,224.0
Interest Rate 0.7% 0.7% 0.7% 0.7% 0.7%
            30.1             30.1             30.1             30.1             30.1
Cash
Beg       1,750.0       8,326.8     15,576.9     23,567.7     32,373.3
Operating Cash Flow       8,199.2       9,018.2       9,919.1     10,910.1     12,000.1
NWC         (516.2)         (567.8)         (624.7)         (687.0)         (755.8)
Debt Borrowings                  -                    -                    -                    -                    -  
Sources       7,683.0       8,450.4       9,294.4     10,223.1     11,244.3
Dividends                  -                    -                    -                    -                    -  
Capital Expenditures       1,106.2       1,200.2       1,303.6       1,417.4       1,542.4
Debt Payments
Uses       1,106.2       1,200.2       1,303.6       1,417.4       1,542.4
End 1750       8,326.8     15,576.9     23,567.7     32,373.3     42,075.3
Firm Name Food N Pak
Your Name Webster University
Initial Year 2018
Receivables % of Sales 8.7%
Inventories % of Sales 10.2%
Payables % of Sales 6.1%
Other Liabilities % of Sales 1.8%
Cost of Revenue % of Sales 63.8%
SGA % of Sales 16.6%
Interest Rate % of Debt 0.7%
Tax Rate % of EBT 20.0%
Dividend % of NI 0.0%
Discount Rate
Depreciation Life Years 10
Capital Expenditures (Asset/Sales Ratio) % of Chg Sales 10.0%
Growth Rate 1 10.0%
2 10.0%
3 10.0%
Terminal 10.0%
Non-recurring % of Sales 0.0%
Debt Growth % Growth Rate 0.0%
Debt Reduction % of O/S Balance 0.0%
Round Num of places 1

Solutions

Expert Solution

  • Enterprise Value = (market capitalization + value of debt + minority interest + preferred shares) – (cash and cash equivalents)
  • EBITDA = Earnings Before Tax + Interest + Depreciation + Amortization

The question concet of EBITDA multiple approach , explain the concept of EV/ EBITDA should be 7.

EBITDA can be calculated as follows.(Bottom-Up Method)

  • Net Income
  • Plus: Taxes
  • Plus: Interest
  • Plus: Depreciation & Amortization
  • Plus: Any adjustments if there

The bottom up approach are the most suitable one as ,all the data is already worked out

New income statement with changes given in questions

2018 2019 2020 2021
Total Revenue $                         47,000 $52,640.0 $57,904.0 $61,957.3
   Cost of Revenue $                        (30,000) $                        (33,600) $                        (37,632) $                        (42,148)
Gross Profit $17,000.0 $19,040.0 $20,272.0 $19,809.4
Operating Expenses
   Depreciation $                            (900) $                         (1,008) $                         (1,109) $                         (1,186)
   S, G & A $                         (7,800) $                         (8,736) $                         (9,610) $                        (10,282)
   Non-recurring charge $                            (500) $                            (560) $                            (616) $                            (659)
Operating Income $7,800.0 $8,736.0 $8,937.6 $7,681.6
   Interest Expense $                            (335) $                              (30) $                              (30) $                              (30)
Earnings before income taxes $7,465.0 $8,705.9 $8,907.5 $7,651.5
   Income Taxes $                         (1,493) $                         (1,741) $                         (1,782) $                         (1,530)
Net Income $5,972.0 $6,964.7 $7,126.0 $6,121.2
Calculation EBITD
2018 2019 2020 2021
Net Income $5,972.0 $6,964.7 $7,126.0 $6,121.2
Tax $                                    1,493 $                                    1,741 $                                    1,782 $                                    1,530
Interset $                                        335 $                                          30 $                                          30 $                                          30
Depreciation $                                        900 $                                    1,008 $                                    1,109 $                                    1,186
EBITD $8,700.0 $9,744.0 $10,046.4 $8,868.0
Year EV (7 multiple) $60,900.0 $68,208.0 $70,324.8 $62,076.3
Discounted EBITD at 8% $8,055.6 $8,353.9 $7,975.2 $6,518.3
EV (7 Multiple of Discounted EDITD) $216,320.31

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