Question

Assignment 4: Financing an Expansion

After twelve (12) years, your business is wildly successful with multiple locations throughout the region. You are now ready to think really big. You want to purchase a huge competitor. (Note: You determine whether the competitor is a privately or publicly held company.) To expand, you will need additional capital from the debt or equity market, or both.

Use one (1) of the valuation techniques identified in Chapters 10 and 11 to calculate the value of the credit repair competitor you wish to purchase. Note: You will have to make assumptions; however, your assumptions need to be rationally supported.

2. Analyze the various financial tools available to you to determine the tools that will be most helpful in assessing whether your credit repair business can afford to purchase the competitor. Support your response.

Imagine you can indeed afford to purchase the competitor; however, you will need an additional $100 million.

3. Examine the options available to you to finance the competitor through the debt market, recommending the best alternative as a result of your analysis. Provide support for your recommendation.

4. Examine the options available to you to finance the competitor through the equity market, recommending the best alternative as a result of your analysis. Provide support for your recommendation.

5. Conduct a cross comparison of your debt and equity examinations to determine where to ideally obtain the additional $100 million funding needed to make the purchase and the approach that you would take to securing the funds. Provide support for your recommendation.

Answer 1

1. Discounted Cash Flow, Trading Comparables and Transaction Comparables Methods   

In discounted cashflows valuation, the value of an asset is the present value of the expected cashflows on the asset, discounted back at a rate that reflects the riskiness of these cashflows. This approach gets the most play in academia and comes with the best theoretical credentials. In this section, we will look at the foundations of the approach and some of the preliminary details on how we estimate its inputs.

Of the approaches for adjusting for risk in discounted cash flow valuation, the most common one is the risk adjusted discount rate approach, where we use higher discount rates to discount expected cash flows when valuing riskier assets, and lower discount rates when valuing safer asset.

2. Enterprise-Value-To-Sales Method - [ EV/Sales Method ]

EV/sales is a valuation tool that give investors an idea of how much it costs to buy the company's sales. Generally the lower the EV/sales the more attractive or undervalued the company is believed to be. High EV/Sales is not always a bad thing as it can be a sign that investors believe the future sales will greatly increase. A lower EV/sales can signal that the future sales prospects are not very attractive. It is important to compare the measure to that of other companies in the industry, and to look deeper into the company you are analyzing.

3. For debt market we can issue bond and debentures and for short term purpose various money market instruments like Treasury bills, Commercial Paper can be used. Beside these the company can use Grants from governments, SBA loans etc.

4. The most common form of equity interest is common stock, although preferred equity is also a form of capital stock. The holder of an equity is a shareholder, owning a share, or fractional part of the issuer. Unlike debt securities, which typically require regular payments (interest) to the holder, equity securities are not entitled to any payment if the company is not having profit

5.   Stocks are stakes in a company, purchased to profit from company dividends or the resale of the stock but debt instrument cannot claim any ownership right. In the debt market, investors and traders buy and sell bonds. Debt instruments are essentially loans that yield payments of interest to their owners. Debt market are riskier compared to equity market