L07: Firm Valuation Extra Practice Problems

1. Your are considering making a bid for a firm with 1.50 M shares outstanding at a
current market price (as of September 30, 2014) of $30/share.
You have the following financial information for the target firm:
10Q (6 months ended 9/30/14) –> Revenues of $16.08 M
10Q (6 months ended 9/30/13) –> Revenues of $10.80 M
10K (year ended 3/31/14) –> Revenues of $25.075 M
The 9/30/14 10Q also reports short-term debt of $0.78 M, long-term debt
of $3.615 M, capitalized leases of $0.14 M, preferred stock of $0.01 M,
and cash and cash equivalents of $0.525 M.

Assuming that the mean Enterprise Value/Revenue multiple for a set of

comparable firms is 1.8x (based on LTM revenue), and that this is the
appropriate valuation multiple, what is the implied per share equity value of the
target firm?

2. You have made a two-year forecast for a potential target firm. Fill in the free cash
flow estimates.
(In $ Millions) Year 1 Year 2
Revenue 957.9 972.2
Cost of goods sold 862.1 875.0
SG&A 67.0 68.1
EBIT 28.7 29.2
Interest expense 12.5 13.4
Taxable income 16.2 15.7
Taxes 5.5 5.3
Net Income 10.7 10.4
Change in net working capital - 2.7 1.8
Capital Expenditures 28.7 29.7
Depreciation 52.7 53.5
Free cash flow

3. You are using DCF to value a company has 51.5 M shares of common stock
and $192.3 M of debt. The book value of their equity is $364.9 M and they have
marketable securities of $14.3 M. The tax rate is 40% and the weighted average
cost of capital is 10.2%. You have estimated free cash flows of $50 M in year 1,
$65 M in year 2, and $75M in year 3. Suppose that the expected growth in free
cash flow beyond the 3-year forecast horizon is 1.8%.
a. What is your estimate of the enterprise value for this target?
 b. Suppose that the above target’s LTM revenue was $312.5M and revenue is
predicted to grow at 20% annually during the forecast horizon. What terminal
multiple of Enterprise Value-to-Revenue is implied by the perpetuity growth rate
assumed in part a?

4. Consider a buyer that has offered $735 million for a target. The buyer has 200
million shares outstanding. Next year’s earnings projections are $80 million for
the buyer and $36 million for the seller. The buyer will pay 40% cash (financed
with debt at 6% interest) and 60% stock (issuing a total of 40 million new
shares). The buyer’s tax rate is 40%. What is the percentage accretion/dilution
in the buyer’s EPS for next year?