Learning Objectives

1 Review calculation of cost of capital (k-wacc).

2 Understand the foibles of equity valuation.

3 Appreciate that the capital budgeting analysis you did in S4 ‘values' one project standing alone - the Merseyside project. The valuation analysis this week values the whole business - all the projects - using similar methodology based on free cash flow.

4 Realize that market price is not the same as intrinsic value.

Q1 - Mark Cartwright is trying to sell his business. He asked you to value the business for him, so he can decide how to price it.

You ran two scenarios of the forecast, then you ran the FCF EQUITY VALUATION MODEL for each scenario, A & B above. Reconcile the two scenarios by examining their inputs and outputs, and recommend to Mark how much you think his business is worth. Include a justification based on your analysis and reconcilation of the two scenarios. HINT: How do Scenario A&B assumptions (inputs) differ?

Q2 - After you finished the FCF Valuation (previous tab), you learned of a business similar to Cartwright Lumber that was sold recently to a new owner.

The data for that sale, a peer company, are already entered for you, in the Q2 Market Multiples template, cells B4.B7.

Interpret that analysis, following the steps explained in chapter 6. Explain the results of your Market Multiples analysis in the box provided.

Q3 - Reconcile the FCF Valuation results with the Market Multiples Valuation results. HINT: Use Summary at row 24.

Q4 - Answer in the box below:

Instead of the FCF Valuation and the Market Multiples Valuation, is it valid to use a simple capitalization formula, such as the #2 formula on page 97 of the Cohen Finance Workbook?

Calculate the value of Cartwright using that formula and discuss the implications.

Additional instructions about this assignment.

1- The Cartwright Lumber Guideline Answers from both S1 and S2 are included in the S5 Assignment Template for your convenience. Review them.

2- The S5 READ THIS FIRST tab lays out the assignment. Read it carefully, digesting the questions you will answer, then go to the step-by-step directions in Chapter 6.

I strongly recommend reading the FCF Valuation directions and completing the FCF Valuation, then read the MM Valuation directions and completing the MM valuation, in that order. For both, follow the steps in the directions as you work with the spreadsheet.

4- Your valuation results will range widely. Don't let that bother you. It's normal. You will need to apply judgment to triangulate the results down to a reasonable value - based on your modeling assumptions and the information in the case.

Attachment:- Assignment.xlsx