Please complete the following questions.
- Explain the implications of case Exhibit 1 (Paige Simon's first task). Based on that exhibit, is terminal value a material component of firm values?
- Drawing on case Exhibit 4 and your own general knowledge, where would the various estimators be appropriate? Where would they be inappropriate? (Simon's second task)
- Regarding the cash flow forecasts in case Exhibit 5, at what point in the future would you set the forecast horizon for the three investments? Why? More generally, what should determine when you stop forecasting annual cash flows and estimate a terminal value?
- Estimate other terminal values based on alternate estimation approaches. From these various estimates, please triangulate toward a single composite estimate of terminal value for each of Sierra Capital and Arcadian's forecasts (you can use a data table to summarize your assessment).
What is the resulting present value (PV) of cash flows under Sierra Capital and Arcadian's outlook?
How significant was TV in creating the difference between the two present value estimates?
- As a general matter in valuation work, how much attention should terminal value garner? What short list of questions about TV could you keep on hand in case a client asked you to opine on a valuation of that company?
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Exhibit 6
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ARCADIAN MICROARRAY TECHNOLOGIES, INC.
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Sensitivity Analysis, Present Value Varying by Terminal Value Growth Assumptions
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Arcadian's View
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Annual growth rate to infinity
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2%
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3%
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4%
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5%
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6%
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7%
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Weighted average cost of capital
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20%
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20%
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20%
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20%
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20%
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20%
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Annual capex (net of depr'n.) 2015
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$0
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($5)
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($12)
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($15)
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($20)
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($28)
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Annual addition to NWC 2015
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-
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(3)
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(5)
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(7)
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(8)
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(9)
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Adjusted free cash flow 2015
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202
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194
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185
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180
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174
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165
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Terminal value 2014
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1,142
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1,173
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1,200
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1,257
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1,314
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1,355
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PV of terminal value 2014
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185
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189
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194
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203
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212
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219
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PV free cash flows 2005-2014
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($151)
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($151)
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($151)
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($151)
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($151)
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($151)
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Total Present Value
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$33
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$38
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$43
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$52
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$61
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$68
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Sierra Capital's View
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Annual growth rate to infinity
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2%
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3%
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4%
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5%
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6%
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7%
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Weighted average cost of capital
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20%
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20%
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20%
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20%
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20%
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20%
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Annual capex (net of depr'n.) 2016
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$0
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($5)
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($12)
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($15)
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($20)
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($28)
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Annual addition to NWC 2016
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-
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(3)
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(5)
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(7)
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(8)
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(9)
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Adjusted free cash flow 2016
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185
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177
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168
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163
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157
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148
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Terminal value 2015
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1,049
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1,073
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1,093
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1,142
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1,189
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1,219
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PV of terminal value 2015
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141
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144
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147
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154
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160
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164
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PV free cash flows 2005-2015
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($118)
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($118)
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($118)
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($118)
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($118)
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($118)
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Total Present Value
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$23
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$26
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$29
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$35
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$42
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$46
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