Ason Kidwell Is Considering Whether Or Not to Acquire a Local Toy Manufacturing Company

ason Kidwell is considering whether or not to acquire a local toy manufacturing company, Toysn Things Inc. The companys annual income statements for the last three years are as follows: 2010 2009 2008 REVENUES 2,243,155 2,001,501 2,115,002 COST OF GOODS SOLD (1,458,051) (1,300,976) (1,374,751) GROSS PROFITS 785,104 700,525 740,251 DEPRECIATION AND ADMINISTRATIVE EXPENSES (574,316) (550,150) (561,500) NET OPERATING INCOME 210,789 150,375 178,751 B. The current owner of Toysn Things indicated to Jason that he would not take less than five times 2010 EBITDA to sell out. Jason decides that, based on what he knows about the company, the price could not be justified, however, upon further investigation, Jason learns that the owners wife is paid $100,000 a year for administrative services that Jason thinks could be done by a $50,000 per year assistant. Moreover, the owner pays himself a salary of $250,000 per year to run the business, which Jason thinks is at least $50,000 too high based on the demands of the business. In additions, Jason thinks that by outsourcing raw materials to Asia, he can reduce the firms cost of goods sold by 10%. After making adjustments for excessive salaries, what value should Jason place on the business? Can Jason justify the value the owner is placing in the business?

PROBLEM 8-1
Given
Sale price
Square footage
Selling price/sq ft
Time on the market
Comp #1
$240,000.00
2,240
$107.14
61 days
Solution
a.
Average price per square foot
Estimated Value
b.
c.
Solution Legend
Comp #2
2121 Tartar Circle
$265,000.00
3,000
2,145
$123.54
32 days
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
PROBLEM 8-2
Given
Solution Legend
Per Square Foot
A
Building size (Sq. ft.)
Rent
Maintenance (fixed cost)
Net Operating Income
% Change in NOI
Selling Price Information
Sales multiple for NOI/sq. ft.
Capitalization rate (1/Sales multiple)
Estimated property value
B
$100
(23)
$77
$120
(30)
$90
A
B
?
?
?
6
16.67%
$462
Total Square Footage
A
B
80,000
90,000
$8,000,000
$10,800,000
(1,840,000)
(2,700,000)
$6,160,000
$8,100,000
A
6
16.67%
$36,960,000
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
B
?
?
?
Solution
a.
b.
Per Square Foot
Alternative Valuation Procedure
Risk free rate
Implied value of maintenance costs
Implied revenue value
Implied revenue multiple
Implied revenue cap rate
Property value/sq. ft.
Implied multiple
Implied cap rate
A
B
5%
5%
Total Square Footage
A
B
5%
Building A
% Change in Revenues
Revenues
Maintenance (fixed cost)
Net Operating Income
% Change in Revenues
% Change in NOI
Alternative valuation procedure involves first assuming
that the fixed cost/sq. ft. is known and can be valued
using the risk free rate of interest. Next, given the value
of comp building A we can calculate the value of the
rental revenues per sq. ft. From this value of revenues
we can estimate the value of Building B's revenues.
Subtracting the value of Building B's maintenance costs
(valued using the risk free rate) from the implied value of
rent/sq. ft. yields a value estimate for Building B of
$52/sq. ft.
5%
Building B
-20%
0%
20%
-20%
0%
20%
(1,840,000)
(1,840,000)
(1,840,000)
(2,700,000)
(2,700,000)
(2,700,000)
-20.00%
0.00%
20.00%
-20.00%
0.00%
20.00%
It can be seen from above that Building B is more sensitive to changes in
revenues--i.e., it has a higher operating leverage. This situation occurs
because it has higher fixed costs (as a percentage of revenue).
PROBLEM 8-3
Given
Financial Information (Millions)
Revenues
EBITDA
Net Income
Earnings per Share
Interest Bearing Debt
Common Equity
Total Assets
Advance
$4,400.00
544.38
240.16
2.183
560.00
939.51
2,615.73
Auto Zone
$5,890.00
1,130.00
562.44
7.301
1,720.00
641.16
4,401.85
0.105
43.95%
12.47%
18.50%
0.596
47.25%
9.42%
16.00%
2.683
49.09%
16.77%
13.00%
$3,240.00
3,360.00
$3,040.00
3,600.00
$6,290.00
8,010.00
10.44
19.42
15.24
1.24
6.61
13.30
11.21
1.79
7.09
11.56
10.21
1.25
12.47%
14.98%
9.42%
25.56%
16.77%
87.72%
8.10%
123.69%
149.59%
5.46%
168.21%
278.42%
9.55%
133.81%
686.55%
14.98%
25.56%
87.72%
Financial Ratios
Debt to Equity
Gross Margins
Operating Margins
Expected Growth in EPS (5 yrs)
Market Valuations (Millions)
Market Capitalization
Enterprise Value
Valuation Ratios
Enterprise Value/EBITDA
P-E Ratio (Trailing)
P-E Ratio (Forward)
Beta
Operating Margin
Return on Equity
Profit Margin
Asset Turnover
Leverage
Product
Solution
a.
b.
Solution Legend
O'Reilly
$2,120.00
321.86
171.62
1.507
120.00
1,145.77
1,713.90
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
PROBLEM 8-4
Given
Cost of goods sold/Revenues
Fixed operating costs
Variable operating costs/Revenues
Depreciation expense
Salary adjustments
Annual outsourcing savings/Revenues
Solution Legend
65%
$250,000
10%
$50,000
$100,000
10%
Historical Incomes Statements for Toys 'n Thing, Inc.
2010
Revenues
$2,243,155
Cost of goods sold
(1,458,051)
Gross profits
785,104
General and Administrative Expenses*
(474,316)
Net Operating Income
$310,789
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
2009
$2,001,501
(1,300,976)
700,525
(450,150)
$250,375
2008
$2,115,002
(1,374,751)
740,251
(461,500)
$278,751
2010
$310,789
50,000
$360,789
Years
2009
$250,375
50,000
$300,375
*Includes depreciation expense of $50,000 per year.
Solution
a.
Net Operating Income
Plus: Depreciation expense
EBITDA
Valuation
EBITDA Multiple
3
4
2008
$278,751
50,000
$328,751
2010
2009
2008
2010
$360,789
100,000
2009
$300,375
100,000
2008
$328,751
100,000
2010
2009
2008
Average
b.
EBITDA
Plus: Salary adjustments
Plus: Outsourcing savings
Adjusted EBITDA
Valuation
Average
Asking price = 5 x 2010 Unadjusted EBITDA
Estimated value after adjustments
EBITDA Multiple
3
4
PROBLEM 8-5
Given
Solution Legend
Cost of goods sold/Revenues
Fixed operating costs
Variable operating costs/Revenues
Depreciation expense
Salary adjustments
Annual outsourcing savings/Revenues
55.00%
$250,000
10.00%
$50,000
$$-
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
Solution
a.
Revenues
Cost of goods sold
Gross profits
General and Administrative Expenses*
Net Operating Income
*Includes depreciation expense of $50,000 per year.
Scenario 1
$1,000,000
Scenario 2
$2,000,000
Scenario 3
$4,000,000
Scenario 2
$2,000,000
Scenario 3
$4,000,000
Percentage change
b.
Fixed operating costs
Variable operating costs/Revenues
Revenues
Cost of goods sold
Gross profits
General and Administrative Expenses*
Net Operating Income
*Includes depreciation expense of $50,000 per year.
Percentage change
$50,000
30%
Scenario 1
$1,000,000
PROBLEM 8-6
Given
Levered equity beta
Risk free rate (10 year US Treasury bond)
Market risk premium
1.27
5.02%
5.00%
Estimated earnings for 2007
Dividend payout ratio
Stock price (12/07/06)
5-year growth rate estimate
$5.69 0.026462039
40.00%
$86.01
10.00%
Description
Sector: Industrial Goods
Industry: Industrial Equipment & Components
Emerson Electric Co.
Parker-Hannifin Corp.
Roper Industries Inc.
Pentair Inc.
Walter Industries Inc.
Market Cap
$34.61B
9.81B
4.44B
3.23B
2.19B
P/E
16.606
15.900
19.276
14.150
24.685
17.943
23.537
Solution
Long-term
Debt to
Price to
Equity
Book Value
0.87
50.471
0.649
10.11
0.494
4.257
0.308
2.298
0.603
3.122
0.485
1.974
4.036
2.731
Net Profit Price To Free
Margin
Cash Flow
5.40%
75.481
7.90%
-134.900
9.54%
65.156
8.25%
34.392
11.89%
232.735
4.48%
147.667
7.38%
-10.682
= Value given in problem
Emerson Comparison
to Industry
= Formula/Calculation/Analysis required
P/E
ROE
Dividend Yield
LTD to Equity
Price to Book
Net Profit Margin
Price to Cash Flow
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
b.
Estimated cost of equity
Estimated growth rate
DCF Estimate of Share Price
Impute growth rate
Dividend
Yield %
1.48%
1.41%
2.40%
1.20%
0.50%
1.70%
0.30%
Solution Legend
a.
c.
Imputed growth rate
Return on
Equity %
14.94%
18.40%
23.72%
18.16%
14.27%
11.56%
15.70%
using
projected
dividends
using
historical
dividend
yields
PROBLEM 8-7
Given
Beta
Dividend payout ratio
EPS for 2007
Stock Price (12/07/07)
Anticipated growth rate in EPS (5 years)
Description
Sector: Technology
Industry: Semiconductor - Broad Line
Intel Corp.
Texas Instruments Inc.
STMicroelectronics NV
Advanced Micro Devices Inc.
Analog Devices Inc.
Maxim Integrated Products Inc.
National Semiconductor Corp.
Market Cap
5344.81B
252.89B
120.51B
44.62B
16.35B
11.79B
11.48B
10.28B
8.04B
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
P/E
27.716
19.9
17.622
11.08
24.959
21.152
22.667
23.025
18.049
Return on Equity
Long-term Debt Price to Book
%
Dividend Yield %
to Equity
Value
Net Profit Margin
14.77%
1.90%
0.691
5.588
10.39%
16.20%
1.30%
0.096
3.42
15.50%
19.63%
1.90%
0.064
3.437
18.72%
22.94%
0.50%
0.004
3.71
18.67%
7.81%
0.70%
0.209
1.764
8.24%
12.61%
0.00%
0.138
2.088
10.13%
15.42%
1.90%
NA
3.342
21.48%
16.93%
1.90%
NA
3.681
21.39%
25.67%
0.60%
0.012
4.481
22.18%
Solution
Intel
Comparison to
Industry
a.
P/E
ROE
Dividend Yield
LTD to Equity
Price to Book
Net Profit Margin
Price to Cash Flow
b.
Estimated cost of equity
Estimated growth rate
DCF Estimate of Share Price
c.
Imputed growth rate
d.
Estimated future dividends
Year
2007
2008
2009
2010
2011
Future growth rate
Value of Intel Shares (2-stage)
2007-2011
2011 and beyond
Estimated equity value
Solution Legend
1.66
48%
$1.13
$20.88
12%
Earnings
$1.13
Dividends
The growth rate in earnings that makes the
value of Intel's shares $20.88 is found using
Goal Seek.
Price To Free
Cash Flow
55.435
193.3
121.039
-5577.55
-11.219
-58.916
311.392
NA
154.483
PROBLEM 8-8
Solution
Solution Legend
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
PROBLEM 8-9
Given
Expected IPO share price
Diluted shares outstanding (millions)
Equity value (millions)
Plus: net debt (millions)
Enterprise value (millions)
2005E reserves
2006 EBITDAX
2007 EBITDAX
FFCF
$20.00
51.6
$1,032.00
740
$1,772
$700
$302
$280
$191
$22.00
51.6
$1,135.00
688
$1,824
Solution Legend
Various share prices
$24.00
$26.00
51.6
51.6
$1,238.00
$1,342.00
637
585
$1,875
$1,927
$28.00
51.6
$1,445.00
534
$1,978
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
$30.00
51.6
$1,548.00
482
$2,030
million
million
million
million
Solution
Part a.
Enterprise Value/2005E reserves
Enterprise Value/2006 EBITDAX
Enterprise Value/2007 EBITDAX
Enterprise Value/FFCF
Part b.
Part c.
Industry mean
2.83
6.33
6.96
8.68
Industry median
2.95
6.4
7.15
9.77
PROBLEM 8-10
Given
Solution Legend
EXHIBIT 1
Financial Information
2003 Shares Outstanding
2003 Fiscal Close Stock Price
Market Capitalization
Short Term Debt
Long Term Debt
Cash & Equivalents
Short Term Investments
EBITDA
Net Income
Calculated EPS
Earthlink
ELNK
$159,399,000
$10.00
$1,593,990,000
$900,000
$$349,740,000
$89,088,000
$218,100,000
$(62,200,000)
(0.39)
Yahoo
YHOO
$655,602,000
$45.03
$29,521,758,060
$$750,000,000
$713,539,000
$595,975,000
$455,300,000
$237,900,000
0.36
eBay
EBAY
$646,819,000
$64.61
$41,790,975,590
$2,800,000
$124,500,000
$1,381,513,000
$340,576,000
$818,200,000
$441,800,000
0.68
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
Microsoft
MSFT
$10,800,000,000
$25.64
$276,912,000,000
$$$6,438,000,000
$42,610,000,000
$14,656,000,000
$9,993,000,000
0.93
Solution
Average
Price to Earnings
Enterprise Value
EBITDA multiple
Part a.
Google
EBITDA
Cash
Debt
Net income
Shares
EPS
IPO proceeds
$800,000,000
$430,000,000
$10,000,000
$400,000,000
271,219,643
$1.47
$1,670,000,000
Earthlink
Imputed IPO price per share from PE ratio
Impute EV from EBITDA multiples
Owner's equity
Impute IPO price per share
Part b.
Part c.
Yahoo
eBay
Microsoft
Average
PROBLEM 8-11
Given
Exhibit P6-11.1 Income Statement and Balance Sheet values are in Thousands
XTO Energy Chesapeake
Energy
Ticker
PERIOD ENDING
Income Statement ($000)
Total Revenue
Cost of revenue
Gross Profit
Operating Expenses
Selling, general, and administrative
Depreciation, depleletion, and amortization
Others
Operating income or loss
Income from Continuing Operations
Total other income/expenses (net)
Earnings before interest and taxes
Interest expense
Income before tax
Income tax expense
Net income from continuing operations
Nonrecurring Events
Effect of accounting changes
Net income
Preferred stock and other adjustments
Net income applicable to common shares
Balance Sheet ($000)
Assets
Current Assets
Cash and cash equivalents
Short-term investments
Net receivables
Inventory
Other current assets
Total current assets
Long-term investments
Property, plant, and equipment
Goodwill
Other assets
Deferred long-term asset charges
Total assets
Liabilities
Current Liabilities
Accounts payable
Short/Current long-term debt
Other current liabilities
Total current liabilities
Long-term debt
Other liabilities
Deferred long-term liability charges
Total Liabilities
Stockholders' Equity
Preferred stock
Common stock
Retained earnings
Treasury stock
Capital surplus
Other stockholders' equity
Total stockholders' equity
Total liabilities and stockholders' equity
Other Financial Data
Exploration expenses (thousands)
Shares Outstanding (millions)
Year-end 2004 Closing Price
Market Capitalization (millions)
Devon
Energy
Apache
Burlington
Resources
XTO
31-Dec-04
CHK
31-Dec-04
DVN
31-Dec-04
APA
31-Dec-04
1,947,601
436,998
1,510,603
2,709,268
204,821
2,504,447
9,189,000
1,535,000
7,654,000
5,332,577
946,639
4,385,938
5,618,000
1,040,000
4,578,000
165,092
414,341
11,880
919,281
896,290
615,822
992,335
1,616,000
2,334,000
3,704,000
173,194
1,270,683
162,493
2,779,568
215,000
1,137,000
640,000
2,586,000
919,281
93,661
825,620
317,738
507,882
(20,081)
972,254
167,328
804,926
289,771
515,155
64,000
3,768,000
475,000
3,293,000
1,107,000
2,186,000
857
2,780,425
117,342
2,663,083
993,012
1,670,071
2,586,000
282,000
2,304,000
777,000
1,527,000
507,882
507,882
515,155
515,155
2,186,000
(10,000)
2,176,000
(1,317)
1,668,754
(5,680)
1,663,074
1,527,000
1,527,000
9,700
14,713
364,836
47,716
436,965
5,624,378
49,029
6,110,372
6,896
51,061
477,436
32,147
567,540
136,912
7,444,384
95,673
8,244,509
1,152,000
968,000
1,320,000
143,000
3,583,000
753,000
19,346,000
5,637,000
417,000
29,736,000
111,093
1,022,625
157,293
57,771
1,348,782
13,860,359
189,252
104,087
15,502,480
2,179,000
994,000
124,000
158,000
3,455,000
11,033,000
1,054,000
202,000
15,744,000
425,173
75,534
259
500,966
2,053,911
199,753
756,369
3,510,999
872,539
91,414
963,953
3,076,405
107,395
933,873
5,081,626
1,722,000
1,378,000
3,100,000
7,796,000
366,000
4,800,000
16,062,000
1,158,131
21,273
103,487
1,282,891
2,619,807
1,022,880
2,372,481
7,298,059
1,182,000
2,000
415,000
1,599,000
3,887,000
851,000
2,396,000
8,733,000
3,484
1,239,553
(24,917)
1,410,135
(28,882)
2,599,373
6,110,372
490,906
3,169
262,987
(22,091)
2,440,105
(12,193)
3,162,883
8,244,509
1,000
48,000
3,693,000
9,087,000
845,000
13,674,000
29,736,000
98,387
209,320
4,017,339
(97,325)
4,106,182
(129,482)
8,204,421
15,502,480
5,000
4,163,000
(2,208,000)
3,973,000
1,078,000
7,011,000
15,744,000
599,500
332.9
$35.38
$11,778.00
184,300
253.2
$16.50
$4,177.80
279,000
482.0
$38.92
$18,759.44
2,300,000
327.5
$50.57
$16,561.68
258,000
392.0
$45.00
$17,640.00
Solution Legend
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
BR
31-Dec-04
This is not the year-end price for BR. It is an
estimate based on the 2004 price range.
Solution (All values in thousands)
a.
Chesapeake
XTO Energy
Energy
Devon
Energy
Apache
Average
Multiple for
Comps
Enterprise Value (EV)
EBITDA
EBITDAX
EV/EBITDA Multiple
EV/EBITDAX Multiple
P/E Multiple
EV based on EBITDA for BR using comps
Plus: Cash
Less: Interest-bearing debt
Equity value
Equity value per share
EV based on EBITDAX for BR using comps
Plus: Cash
Less: Interest-bearing debt
Equity value
Equity value per share
Equity value per share based on P/E multiple
XTO
Interest-bearing debt (ST&LT)
Common equity (price x shares outstanding)
Less: Cash and equivalents
Equals: Enterprise value
b.
c.
d.
Enterprise Value Calculations
CHK
DVN
APA
BR
Burlington
Resources
(BR) - Actual
Burlington
Resources
(BR) - 2005
Forecast
PROBLEM 8-12: Mini-Case "Dick's Sporting Goods IPO"
Given
Shares outstanding
Offering Price 10/16/02
Solution Legend
9.47 million
$12.25
Exhibit P8-12.3
Dick's Sporting Goods Financial Data ($ millions)
Revenues
Gross Profit
EBIT
Depreciation & Amortization
EBITDA
Balance Sheet Data 8/3/02
Checks Drawn
Current Portion of Long Term Debt
Revolving Bank Line of Credit
Long Term Debt & Capital Leases
Total Debt
Cash
Stockholder's Equity
= Value given in problem
= Formula/Calculation/Analysis required
= Qualitative analysis or Short answer required
= Goal Seek or Solver cell
= Crystal Ball Input
= Crystal Ball Output
$1,173.794
$298.453
$55.899
$13.499
$69.398
$33.584
$0.211
$90.299
$3.466
$127.560
$13.874
$78.984
This represents the balance of checks
written that have not cleared the firm's
bank account.
Debt/Capitalization
Debt/EBITDA
Source: Dick's Sporting Goods Prospectus S-1 dated September 27, 2002
Solution
a. Implied Enterprise Valuation for DKS Based on Market Comparables
Average Comps DKS Statistic
Revenue Multiple
0.37x
$1,173.794
EBITDA Multiple
5.20x
$69.398
EBIT Multiple
8.30x
$55.899
Implied EV
b. Determine DKS' Implied Equity Value by subtracting Net Debt
Implied
Enterprise Value
DKS
Net Debt
Implied Multiple
based on IPO
Price
Discount to
Comps
Revenue Multiple
EBITDA Multiple
EBIT Multiple
Analysis:
Equity Market Capitalization based on
9.47 million shares
DKS Net Debt
DKS Enterprise Value at IPO actual
price of $12.25
EV/Revenue Multiple
EV/EBITDA Multiple
EV/EBIT Multiple
Analysis:
Implied Equity
Implied IPO
Value
Value Per Share