Question

Using the following information, estimate the total value of this privately held company.

Estimates of Year 1 (next year) financial performance (Unit: $ million)
Revenue	900
Costs of goods sold	100
Selling, general and administrative expenses including R&D	200
Depreciation	50
Property and equipment	1100
Working capital	150
Current (Year 0) financial data (Unit: $ million)
Property and equipment	950
Working capital	110
Other information for valuation
Operating tax rate	21%
The estimated growth rate of cash flows (Assume that this growth rate is constant)	6%
This company has no debt.
Assume that 14% is the required return on this company’s assets.

Answer 1

	Value of Privately held Company
	= Free Cash Flowof Next Year / (Required Return - Growth Rate)
	Where,
	Free Cash Flow
	= Net Opearting Income of Next Year - Increase in Property and Equipment - Increase in Working Capital
	Net Operating Income of Next Year
	= (Revenue-Cost of Goods Sold-Selling and other expenses)*(1-Tax Rate)+Depreciation*Tax Rate
	= ($900 - $100 - $200)*(1-21%) + $50*21%
	= $600*0.79 + $10.50
	= $474 + $10.50
	= $484.50
	Increase in Property and Equipment
	= Next Year's Property and Equipment - (Current Year Property and Equipment - Depreciation)
	= $1100 - ($950 - $50)
	= $1100 - $900
	= $200
	Increase in Working Capital
	= Next Year's Working Capital - Current Year's Working Capital
	= $150 - $110
	= $40
	Free Cash Flow
	= Net Opearting Income of Next Year - Increase in Property and Equipment - Increase in Working Capital
	= $484.50 - $200 - $40
	= $244.50
	Value of Privately held Company
	= Free Cash Flowof Next Year / (Required Return - Growth Rate)
	= $244.50 / (14%-6%)
	= $244.50 / 8%
	= $3056.25 million