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DCF and fair market value

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Consider the financial statements below. The firm's cost of capital is 10%. The firm is stable and the long-term growth rate for all items is expected to be 4%. Use the information below to estimate the fair market value of the companies equity as of year-end 2013.

2013 Income Statement
Sales 500
Cost of goods sold 250
SG&A expense 50
EBIT 200
Interest expense 40
Taxable income 160
Taxes 64
Net Income 96

2012 Balance Sheet
Cash 50 Accounts payable 70
Accounts receivable 100 Total current liab. 70
Inventory 200
Total current assets 350 Long-term debt 400

Gross fixed assets 1,000 Common stock 200
Accumulated depreciation 200 Retained earnings 480
Net fixed assets 800 Total equity 680
Total 1,150 Total 1,150

2013 Balance Sheet
Cash 70 Accounts payable 100
Accounts receivable 130 Total current liab. 100
Inventory 220
Total current assets 420 Long-term debt 450

Gross fixed assets 1,120 Common stock 250
Accumulated depreciation 270 Retained earnings 470
Net fixed assets 850 Total equity 720
Total 1,270 Total 1,270

Please use DCF and show work and briefly describe rationale of calculation so I can understand the process better.

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Solution Preview

Please see the attached spreadsheet for the discounted cash flow analysis ...

Solution Summary

The spreadsheet contains a simple valuation model that can be used to find the equity value of a company. The model is simple in nature, but can be used as a starting point for more complex valuation projects.

$2.19
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Global Financial Management

Acme is also considering the acquisition of a firm in the Czech Republic and would like your opinion on this. It plans to operate the firm for 3 years and then reevaluate the holding.

Free Cash flows are estimated as follows:

â?¢Year 1 - 38.63M Czech Koruna (CZK), Year 2 - 44.33 M CZK,
â?¢Year 3 - 50.48M CZK
â?¢The third year terminal value is estimated at 375M CZK.
The Czech Koruna's exchange rate is assumed to be .038 USD/CZK for each year. Acme uses a WACC of 13 % for its domestic projects. So, the PV of the FCF's for the firm is 363.78 M CZK or $13.82M. The Czech firm has 1,000,000 shares outstanding and a debt to equity ratio of 1:1. Current market price is 185 CZK per share.

All monetary information (except per share) should be presented in CZK millions (i.e., do not convert to USD).

1.Should Acme make a deal if its policy is to never exceed a 20% premium in any tender offer? To defend your position, you must prepare and present an Excel template that includes the calculated fair value premium over market.
2.What changes in the analysis or additional analysis do you suggest before a final decision should be made?
3.Using the DCF methodology required in question 1, please take one of your suggestions and reevaluate the buy-out. To complete this question, you will have to present a second Excel template that includes your new assumed values and supports your recommendations. Further, please comply with the following:
â?¢Assumptions must be reasonable â?" i.e., donâ??t select arbitrary values. Some discussion should be provided that explains how you arrived at your new assumed values.
â?¢Variable changes should be restricted to the discount rate, the FCFs, and/or the terminal value. Please present only one set of assumptions (e.g., do not submit a table that includes multiple values for the same variables.)
â?¢To demonstrate that you have successfully prepared the Excel template, no two students may use the same values. To help ensure that your values are unique, please use a minimum of three significant (i.e., non-zero) digits to the right of the decimal point.

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