Discounted Cash Flow
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Case-74 Solution GIVEN IN CASE
Electro Technology Corporation
Entrepreneurship Financing and Valuation
This case illustrates a relatively simple discounted cash flow
valuation of an entrepreneurial business. The model uses five
years of forecasted equity cash flows and a final lump sum based
on growth as the basis of the valuation.
THIS IS A FULL VERSION OF THE MODEL WITH ALL FORMULAS COMPLETED AND FIXED
INPUTS FOR A GRAPH OF FIRM VALUE AT VARIOUS GROWTH RATES.
= = = = = =
INPUT DATA: KEY OUTPUT:
(Dollar Amounts in Millions) (Dollar Amounts in Millions)
Discount rate 0.28 Terminal Value 308.0684211
Terminal growth rate 0.09 Equity value 157.5827837
New capital required 86 Equity cap required 51
(in millions) Venture ownership % 0.323639415
Bank loan (in millions) 35 P/E method value 145.453
Estimated P/E ratio 5.5
= = = = = =
MODEL-GENERATED DATA: (Dollar Amounts in Millions)
Terminal Value Analysis:
Terminal value CF 308.0684211
Cash Flow Statements:
Year 1 Year 2 Year 3 Year 4 Year 5
Net sales 33 76 165 190 210
Cost of goods sold 11.19 24.68 62.9 73.7 82.3
Depreciation 3 8 8 8 8
------ ------ ------ ------ ------
Gross margin 18.81 43.32 94.1 108.3 119.7
General/admin expenses 12 18 23 27 30
Debt service 7 7 7 7 7
------ ------ ------ ------ ------
Pre-tax earnings -0.19 18.32 64.1 74.3 82.7
Taxes 0 8 29 33 37
------ ------ ------ ------ ------
Net income -0.19 10.32 35.1 41.3 45.7
Depreciation/amort 3 8 8 8 8
Terminal value 308.0684211
------ ------ ------ ------ ------
Net cash flow to equity 2.81 18.32 43.1 49.3 361.7684211
====== ====== ====== ====== ======
DCF Equity Value:
PV of net cash flows 157.5827837
Financing Structure: $321.33
New capital required 86
Bank loan 35
----
Equity capital required 51
====
Percent of equity value 0.323639415
====
P/E Value Estimate:
Average 5-year earnings 26.446
Equity value 145.453
Sensitivity Analysis:
Impact of terminal growth rate on value
growth terminal equity
value value
0.09 308.0684211 157.5827837
0 191.7857143 123.7400619
0.025 215.8529412 130.7445468
0.05 245.1521739 139.2717458
0.075 281.597561 149.8787495
0.1 328.1666667 163.4321431
0.125 389.7580645 181.3575991
0.15 475.0384615 206.1774612
0.175 600.9285714 242.8163054
0.2 805.5 302.3544271
= = = = = = =
END
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