Question

5. 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. 2021 free cash flow: $9.0MM
   2. 2022 free cash flow: $9.8MM
   3. 2023 free cash flow: $10.5MM
   4. Annual FCF growth after 2022: grows at 2%
   5. 2020 EBITDA: $9.5MM
   6. 2020 Net Income: $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

Develop a free cash flow discounted valuation PLUS any other two valuation methods to estimate the total value of Equity.                                   

Answer 1

	2021	2022	2023	2024
FCF	$9.0	$9.8	$10.5	$10.7
Growth rate		8.9%	7.1%	2.0%
PV of FCF	$8.0	$7.8	$7.5
Terminal value			$107.1
PV of terminal value			$76.2
Total PV			$99.6

PV of 2021 FCF = 9 / ((1+12%)^1) = $8.0

PV of 2022 FCF = 9.8 / ((1+12%)^2) = $7.8

PV of 2023 FCF = 10.5 / ((1+12%)^3) = $7.5

Terminal value = next year's FCF / (WACC - FCF growth rate) = (10.5 * 1.02) / (12% - 2%) = $107.1

PV of terminal value = 107.1 / ((1+12%)^3) = $76.2

Value of firm = PV of free cash flows + PV of terminal value = 8 + 7.8 + 7.5+ 76.2 = $99.6MM

Equity value = EV - net debt (cash balance not mentioned, assumed zero) = 99.6 - 6 = $93.6MM

Using EV / EBITDA multiple of comparables of 10x, EV of the company = 10 * 9.5 = $95MM

Equity value = EV - net debt (cash balance not mentioned, assumed zero) = 95 - 6 = $89MM

Using PE ratio of comparables of 20x, 20 = price per share / earnings per share

i.e. 20 = (price per share * shares outstanding) / (earnings per share * shares outstanding) = equity value / net income

Hence, equity value = 20 * net income = 20 * 6 = $120MM