Reading 44: Private Company Valuation-LOS e 习题精选 buyer, 2010, strategic, required, private

土豆妮

Session 12: Equity Investments: Valuation Models
Reading 44: Private Company Valuation

LOS e: Demonstrate the adjustments required to estimate the normalized earnings and/or cash flow for a private company, from the prespective of either a strategic or nonstrategic (financial) buyer, and explain cash flow estimation issues.

 

 

 

Given the following figures, calculate the normalized EBITDA for a financial and strategic buyer.

Reported EBITDA	$4,500,000
Current Executive Compensation	$700,000
Market-Based Executive Compensation	$620,000
Current SG&A expenses	$6,300,000
SG&A expenses after synergistic savings	$5,600,000
Current Lease Rate	$300,000
Market-Based Lease Rate	$390,000

The normalized EBITDA for each type of buyer is:

Financial Buyer

Strategic Buyer

A) $4,190,000 $4,890,000

B) $4,670,000 $5,370,000

C) $4,490,000 $5,190,000

---

 

Both strategic and financial buyers will attempt to reduce executive compensation to market levels by $80,000 ($700,000 ? $620,000). They will also have to pay a higher lease rate of $90,000 ($390,000 ? $300,000). So the adjustment for both buyers to generate normalized EBITDA is $4,500,000 + $80,000 ? $90,000 = $4,490,000.

However, only a strategic buyer will be able to realize synergistic savings of $700,000 ($6,300,000 ? $5,600,000). So normalized EBITDA for a strategic buyer is $5,190,000 and for a financial buyer it is $4,490,000.

土豆妮

Given the following figures, calculate the FCFF. Assume the earnings and expenses are normalized and that capital expenditures will cover depreciation plus 3 percent of the firm’s incremental revenues.

Current Revenues	$30,000,000
Revenue growth	6%
Gross profit margin	20%
Depreciation expense as a percent of sales	1%
Working capital as a percent of sales	15%
SG&A expenses	$3,800,000
Tax rate	30%

A) $927,400.

B) $1,245,400.

C) $1,785,400.

---

The answer is calculated as follows:

Pro forma Income Statement
Revenues	$31,800,000
Cost of Goods Sold	$25,440,000
Gross Profit	$6,360,000
SG&A Expenses	$3,800,000
Pro forma EBITDA	$2,560,000
Depreciation and amortization	$318,000
Pro forma EBIT	$2,242,000
Pro forma taxes on EBIT	$672,600
Operating income after tax	$1,569,400
Adjustments to obtain FCFF
Plus: Depreciation and amortization	$318,000
Minus: Capital expenditures	$372,000
Minus: Increase in working capital	$270,000
FCFF	$1,245,400

The following provides a line by line explanation for the above calculations.

Pro forma Income Statement	Explanation
Revenues	Current revenues times the growth rate: $30,000,000 × (1.06)
Cost of Goods Sold	Revenues times one minus the gross profit margin: $31,800,000 × (1 ? 0.20)
Gross Profit	Revenues times the gross profit margin: $31,800,000 × 0.20
SG&A Expenses	Given in the question
Pro forma EBITDA	Gross Profit minus SG&A expenses: $6,360,000 ? $3,800,000
Depreciation and amortization	Revenues times the given depreciation expense: $31,800,000 × 0.01
Pro forma EBIT	EBITDA minus depreciation and amortization: $2,560,000 ? $318,000
Pro forma taxes on EBIT	EBIT times tax rate: $2,242,000 × 0.30
Operating income after tax	EBIT minus taxes: $2,242,000 ? $672,600
Adjustments to obtain FCFF
Plus: Depreciation and amort.	Add back noncash charges from above
Minus: Capital expenditures	Expenditures cover depreciation and increase with revenues: $318,000 + (0.03 × $31,800,000 ? $30,000,000)
Minus: Increase in working capital	The working capital will increase as revenues increase: (0.15 × $31,800,000 ? $30,000,000)
FCFF	Operating income net of the adjustments above

---

土豆妮

Which of the following best describes the use of FCFF and FCFE when used in private firm valuation?

A) FCFF is usually favored if the firm is going to change its capital structure because the WACC is less sensitive to leverage changes than the cost of equity.

B) FCFE is usually favored if the firm is going to change its capital structure because the equityholders are usually the investors requesting the valuation.

C) FCFE is usually favored if the firm is going to change its capital structure because the cost of equity is less sensitive to leverage changes than the WACC.

---

Free cash flow to the firm (FCFF) can be used to value the firm as a whole and free cash flow to equity (FCFE) can be used for equity. FCFF is usually favored if the firm is going to significantly change its capital structure. The reason is that the discount rate used for FCFF valuation, the weighted average cost of capital (WACC), is less sensitive to leverage changes than the discount rate used for FCFE valuation, the cost of equity. Thus, the FCFF valuation will not vary as much as the FCFE valuation.