Question

Calculate the equity value for the following company. EBITDA in year 1 is expected to be $100M and is expected to grow by 1% for each of the next 5 years. Cap Ex, TIs and LCs are expected to be $7M in year 1 and are expected to grow at 3% for each of the next 5 years. Currently the company has $500M in debt and this is expected to remain constant going forward. Assuming an exit in year 6, what is the equity value of the company today? Assume a 10% discount rate and an 8% cap rate.

Answer 1

In order to derive equity value of the company, discounted EBITDA and Cap Ex, TIs and LCs needs to be determined to arrive at the present value.

Discounted EBITDA from year 1 to 6 = $ 100 million * Present value factor of 9% for 6 years = 100 m * 4.4859 = $ 448.59 m

Discounted Cap Ex, TIs and LCs = $ 7 m * Present Value factor of 7% for 6 years = $ 7 m * 4.7665 = $ 33.37 m

The discounted income = 448.59 - 33.37 = $ 415.22 million which will be considered to be capitalized to determine the capital outlay of the company

Therefore, $ 415.22 million / 8% = $ 5190.25 million which includes both debt and equity component.

Equity value = 5190.25 - 500 = $ 4690.25 million

Notes:

1) TI = Tenant Improvement & LC = Leasing commission which is classified as capital expense under this question.

2) Growth is for next 5 years which means year 2 to 6. Hence 6 years is considered to discount the income and expenses.

3) Discount rate of 10 percent as decreased by the growth rates (1 or 3%) is considered for discounting purposes.

4) Present value annuity factors are taken in consideration from the table easily available in any relevant book or website.

5) Capitalization rate is the rate at which income is capitalized to determine the total capital outlay which includes debt component.

6) EBITDA = Earnings before Interest, Taxes, Depreciation and Amortization.