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Valuation Case

Andrew Hawks, founder of a Caribbean based start-up firm, NABR Publishing Ltd. just completed development of his firm’s financials; after working so hard to crunch his numbers he was convinced that his interviews for the next day with the national bank and two equity investors would go well. In particular, Hawks expressed the view that his income projections for NABR would strengthen his case on determining his firm’s potential and value and relied heavily on the fact that his firm was operating in a low risk industry, where comparable stocks historically performed at 10% lower risks.

NABR’s revenues were premised on the Hawk’s belief that revenues would grow by 15%, 20%, 22% and 25% respectively after the start year. He was very confident about his firm’s ability to produce new print products and thought that after year 2 he would re-position the firm by adding digital content as a basis for new products.

Jay, a close friend and former class mate of Hawks, who had a distinguished career in debt financing, met with him on his financials a week before the scheduled meeting and advised him that he was not as convinced about the income projections. He noted that Hawks had projected free cash-flows of 15M, 44M, 62M, 80M and 98M for years 1-5 five years respectively with net earnings in the final at 55M, which seemed too ambitious. Jay advised Hawks that trimming his forecasts by three quarters would be best before the meeting with debt financiers.

Hawks respectfully disagreed with his colleague and prepared a presentation with his stated projections asking for a loan of 8M, which he projected would amount to 70% of his total debt and equity financing plans for year one. He also wondered about the possibility of asking for smaller amounts in an effort to have an optimal capital structure for his firm. He thus considered asking for 4M, which he projected would amount to 35% of his total debt and equity financing in year two and 2.2M amounting to 21% in year three. Although he considered these he did not include any other option in his presentation to the national bank.

As Hawks sat down to watch the evening news that day, he noticed the headline topic was the rising cost of capital in the economy with a feature story on the national bank, the feature stated that the bank’s loan rates had just increased to 18%, a rate that was 14.5% higher than the return on government bonds. The news feature ended on the note that corporate tax was as high as 35%.

Realizing that the cost of debt was higher than he expected, Hawks decided to brave a call to one of the two equity investors to discuss the nature of returns that investors required. He was surprised to hear that the equity investor had a minimum threshold of 25% on returns. Prior to calling he had researched the historical market risk premium for firms in his industry and noted it was 8%.

While discussing the rate, the investor asked Hawks how much NABR is worth. Hawks did not have an answer but advised that he would be ready with a valuation for their meeting.

2 Individual Project problems:

1.) Mr. Hawks contacted Galen University for assistance in generating a firm value of NABR Ltd. (assuming no debt using DCF)? He also asked what would be the value of NABR if he has both debt and equity (using DCF). He also inquired what would be NABR’s firm value from the perspective of the equity investors whom he understands uses the Venture Capital Model (when asked about P/E ratios he referenced that comparable firms had an average P/E ratio of 15. 

2.) Additionally, Mr. Hawks asked for assistance in identifying the most optimal capital structure for NABR, and given he did not understand the topic he requested a brief summary of the impact of having too much debt or too much equity to finance his firm.

3.) As a final request, Mr. Hawks declared that he did not know much about valuation and asked for the results to be describeed in a memo to him so that can be fully prepared for negotiations at his meetings (Note, in this memo the actual recommended firm value for NABR Ltd. based on your assessment must be clearly stated). Mr. Hawks also asked that all assumptions and reasoning are shared with him to aid his understanding of the value derived. 

4.) Be sure to describe to Mr. Hawks how you arrived at the discount rates used to find out the recommended firm value. 


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