Question

The company has revenues of £235million, a gross margin of 47% and an EBITDA margin of 1%. Interest costs of £6 million make it loss-making overall.

Prepare a summary income statement for the last financial year from the information above, including Revenue, Cost of Goods Sold, Gross Profit, Gross Margin, Overheads, EBITDA, EBITDA Margin, Interest Costs, Net Profit and Net Margin.

Your boss wants you to model some of his ideas for improving the business.

Closing failing stores. This would decrease the revenue by £35 million and decrease the overheads by 33%. The gross margin and interest costs remain the same. What is the new EBITDA, EBITDA margin, Net Profit and Net Margin?

Restructure the financing. This cuts the interest cost by 50%. What is the new Net Profit and Net Margin?

Fire the management team and replace them with another. This increases the overheads by £1million per year. What is the new EBITDA and EBITDA margin?

After making these three changes, the business is forecast to trade at about the same rate of turnover for the next 3 years, with margins remaining consistent. At the end of year 3, Savage intends to sell the firm at a multiple of 5 x EBITDA. Refinancing the business will incur a one off cost of £10 million now.

Your boss tells you to prepare a Net Present Value calculation using Net Profits as a substitute for cash flows where needed. The firm uses a discount rate of 15%.

What is the current valuation of the companyon an NPV basis? The current owners would accept £15 million for the business, do you recommend that Savage Partners does this deal?

Do you have any other ideas of how to improve (pick up to three)?

Answer 1

1. Summary income statement for the last financial year

2. Revised data after closing failing stores:

3. Restructure the financing. Revised figures are:

4. Fire the management team ane replace them. Revised figures would be:

5. Net present value calculations

15 million for the business is way below the current valuation of the firm which is 97 million(calculations above). Therefore, savage partners should not undertake this deal.