Question

You are preparing a valuation for an acquisition target, C Corporation. A team member has created the following list of facts assumptions: o The company has a mix of debt and common stock in its capital structure. The mix is expected to remain constant, and the WACC for the foreseeable future is 9.5%. o For the last full year (which has just ended), NOPLAT2018 was $225M, with FCF2018 of $145M. o Over the last 5 years, the investment rate (IR) has consistently averaged 25% and return on investment (ROIC) has consistently averaged 11%. The company has an opportunity to increase growth over the next three years by investing in a new product update. This will require additional investment, such that over the three years, IR will average 40%. Due to promotional expenses and additional R&D during these three years, ROIC on new investment will fall to 10%. AFTER the three years of increased growth, both IR, and ROIC on new investments, will return to their pre-growth averages of 25% and 11%.

Estimate the enterprise value (EV) of C Corporation Today

Answer 1

	F0	FCF last year(Free Cash flow)	$145,000,000
		Growth Rate=ROIC*IR
	g	Expected Growth Rate next 3 years	0.04	(0.4*0.1)
	F1=F0*(1+g)	Expected FCF in year1	$150,800,000
	F2=F1*(1+g)	Expected FCF in year2	$156,832,000
	F3=F2*(1+g)	Expected FCF in year3	$163,105,280
	g1	Growth Rate during last 5 years	0.0275	(0.25*0.11)
	g1	Constant growth rate fromyear 4	0.0275	(0.25*0.11)
	F4=F3*(1+g1)	Expected FCF in year 4	$167,590,675
		Required return =Cost of capital=9.5%	0.095
	H3=F4/(0.095-g1)	Horizon Value in year3	$2,482,824,818
		Enterprice value =Present value of Future Cash flows
		Present Value (PV) of Cash Flow:
		(Cash Flow)/((1+i)^N)
		i=Discount Rate=Cost of Capital=0.095
		N=Year of Cash Flow
		N	A	PV=A/(1.095^N)
		Year of Cash flow	Cash Flow	PV of cash flow
	F1	1	$150,800,000	$137,716,895
	F2	2	$156,832,000	$130,799,608
	F3	3	$163,105,280	$124,229,765
	H3	3	$2,482,824,818	$1,891,053,085
			SUM	$2,283,799,352
		Enterprise Value(EV) of c corporation Today	$2,283,799,352
		Rounded to	$2,284	Million