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Enterprise Value, Operating Expense and Capital Expense

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1.In March 2005, General Electric (GE) had a book value of equity of $113 billion, 10.6 billion shares outstanding, and market price of $36 per share. GE also had cash of $13 billion, and total debt of $370 billion.
What was GE's Enterprise value? (Points: 1)
0.97
3.27
3.38
$381.6 billion
738.6

2. Suppose a firm's tax rate is 35%.What effect would a $10 million operating expense have on this year's earnings? What effect would it have on next year's earnings?

3. Suppose a firm's tax rate is 35%.What effect would a $10 million capital expense have on this year's earnings, if the capital is depreciated at a rate of $2 million per year for 5 years? What effect would it have on next year's earnings?

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Solution Summary

This solution explains:

1) How to calculate the enterpise value of a firm.

2) What effect operating expenses have on current and next-year earnings.

3) What effect capital expenses have on current and next-year earnings.

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MBA 540 Valuation Exercise

The terminal value is going to be a large number but please keep in mind you need to calculate the present value of the terminal value.

As far as net present value is concerned, please refer to Excel Help section per "NPV" function. If you would like to use a formula, then use the following:

PV = Cash Flow at n th year / (1 + discount rate)^n th year. By way of example, let's the cash flow at 5th year was $1,000. The discount rate is 12%. The present value of $1,000 at 5th year is 1000/ (1 + 12%)^5 = 567.43.

Since you have the cash flows for 5 years, you need to calculate the present value for each year or you can use Excel NPV formula to calculate the entire cash flows at once.

Please review the "examples" tab. Basically, you need to use public sources (such as yahoo finance, smartmoney, cnnfn.com, wsj.com, etc.) to find out these companies' financial information. Then you will come up with revenue and EBITDA multiples to come up with an estimated value Shang-wa. This is one of the valuation techniques.

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see attached for more....

(US$ in 000's) 2002 2003 2004 2005 2006 2007 2008 2009
Actual Actual Actual Fcst Fcst Fcst Fcst Fcst
Revenue 65,089 80,191 109,288 109,288 109,288 109,288 109,288 109,288
Revenue Growth % 23.2% 36.3% 0.0% 0.0% 0.0% 0.0% 0.0%
Cost of Goods Sold 45,259 51,446 66,381 54,644 54,644 54,644 54,644 54,644
Gross Profit 19,830 28,745 42,907 54,644 54,644 54,644 54,644 54,644
Gross Margin 30.5% 35.8% 39.3% 50.0% 50.0% 50.0% 50.0% 50.0%

Operating Expense 12,861 15,694 20,201 27,322 27,322 27,322 27,322 27,322
Operating Expense % of revenue 20% 20% 18% 25% 25% 25% 25% 25%

Operating Income 6,969 13,051 22,706 27,322 27,322 27,322 27,322 27,322

Add: Depreciation 7,334 5,959 4,736 - - - - -

EBITDA 14,303 19,010 27,442 27,322 27,322 27,322 27,322 27,322

Change in Working Capital (19,797) (1,381) (2,253) (2,000) (2,000) (2,000) (2,000) (2,000)

Less: Capital Expenditures (40,438) (24,419) (24,551) - - - - -

Cash Flow (45,932) (6,789) 638 25,322 25,322 25,322 25,322 25,322
Terminal Value

Net Cash Flow (45,932) (6,789) 638 25,322 25,322 25,322 25,322 25,322

NPV $-

DCF Instructions
* Only the cells shaded yellow are the ones you need to fill out
1. Fill out the revenue section (Year 2005 through Year 2009) based on the average revenue growth % from 2002-2004
2. Fill out the gross margin section based on the average gross margin % from 2002-2004
3. Fill out the operating expense section based on the average operating expense % (of revenue) from 2002-2004
4. Fill out the Capital Expenditures section. Use 15% of revenue. Make sure you use a minus (-) sign in front of each capEx figure
5. Calculate the Terminal Value in Year 2009 by using 8.0x EBITDA multiple (i.e., Shang-wa's 2009 projected EBITDA x 8.0x)
6. Calculate the NPV based on a 15% discount rate. Please remember you don't use the historical financials for the NPV calculation (you only use the projected net cash flows)

(US$ in 000's) Revenue EBIT "EBIT
Margin" EBITDA "EBITDA
Margin" Net Income "Net
Margin" "Interest-Bearing
Debt" Cash "Market
Value as of
9/6/06" "Enterprise
Value (EV)" EV/Revenue EV / EBITDA
Kemet 234,000 - - 0.0% - 0.0% - 0.0% - - - - 0.0x 0.0x
AVX Corp - - 0.0% - 0.0% - 0.0% - - - - 0.0x 0.0x
Vishay Intertechnology - - 0.0% - 0.0% - 0.0% - - - - 0.0x 0.0x
WMS Industries - - 0.0% - 0.0% - 0.0% - - - - 0.0x 0.0x
Evergreen Solar - - 0.0% - 0.0% - 0.0% - - - - 0.0x 0.0x

Average 0.0x 0.0x

Shang-wa's Enterprise Value
Based on Revenue Multiple $-
Based on EBITDA Multiple $-

Average EV $-

Comparable Public Company Approach Instructions:
* Only the cells shaded yellow are the ones you need to fill out
1. Use online finance websites (i.e., Yahoo Finance, Google, Smartmoney, Wall Street, etc.) to collect the financial data for the companies listed above. Use the most recent financial data based on the trailing twelve months (or last twelve months)
2. Calculate the EV/Revenue and EV/EBITDA Multiple
3. Calculate Shang-wa's estimated enterprise value based on the average multiples you have come up

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