Question 1. (TCO B) Use the following current year financial statements for Sambora Engineering to perform ratio analysis.
Sambora Engineering Income Statement
Revenue $3,400,000
Cost of goods sold 1,100,000
Gross profit 2,300,000
Operating expenses 1,400,000
Operating income (EBIT) 900,000
Interest expense 350,000
Earnings before taxes 550,000
Taxes (at 40%) 220,000
Net income $330,000
Sambora Engineering Balance Sheet
Current assets
Cash $800,000
Accounts receivable 450,000
Inventory 150,000
Total current assets 1,400,000
Non-current assets
Fixed assets 5,000,000
Accumulated depreciation (1,250,000)
Net fixed assets 3,750,000
Total assets $5,150,000
Current liabilities
Accounts payable $970,000
Accrued liabilities 180,000
Total current liabilities 1,150,000
Non-current liabilities
Bonds payable 1,000,000
Total liabilities 2,150,000
Common stock 300,000
Retained earnings 2,700,000
Total shareholders' equity 3,000,000
Total liabilities and shareholders' equity $5,150,000
(a) Calculate the firm’s total-debt-to-assets ratio. Assume that the firm’s prior year-end total liabilties balance was $2.4 million and the firm's prior year-end total assets balance was $5 million.
(b) Calculate the firm’s net working capital.
(c) What is the number of “days in inventory” for Sambora Engineering? Assume that the firm’s year-end inventory balance for the prior year was $100,000.
(d) What is the firm’s return on equity at the end of this year? Assume that the firm’s year-end shareholders' equity balance for the prior year was $2,600,000
Question 2. (TCO F) Harman Electrical Engineering (HEE) has developed a ground-breaking new robotics technology already in use to build major civil engineering construction projects around the country. The firm is privately held and there is no public market for its common stock. HEE’s 2012 EBIT was $3.9 million. The firm’s year-end 2012 accumulated depreciation balance was $1.1 million; at the end of 2011, that balance was $800,000. At the end of 2012, HEE had total liabilities of $4.4 million, which included a $2.6 million loan balance, and the firm’s total shareholders’ equity balance was $1.6 million. The CEO has asked you to determine the value of HO’s equity. Your research reveals that BridgeTech is a public company that develops robotics software for large-scale manufacturing operations. BridgeTech’s share price is $120 and the firm has 500,000 shares outstanding. BridgeTech also has $15 million in bonds outstanding, and its EBITDA is $18.75 million. Make sure to provide all calculations in your answers to each of the following questions:
Required:
(a) Calculate BridgeTech’s enterprise value and EBITDA multiple.
(b) Calculate Harman Electrical Engineering’s EBITDA.
(c) After completing (a) and (b) above, use BridgeTech’s EBITDA multiple to determine HEE’s implied Enterprise Value and its estimated equity value.
Question 3.(TCO H) Your management team identifies a biotech firm, BioBalance, that has found a new diabetes treatment. The firm’s founders are out of money and want to sell their technology. Because you and your team don’t have enough money to acquire the firm outright on your own, you turn to outside sources of funding. A venture bank is willing to put up an $8 million, four-year loan at 14% per year, which only has interest payments due during its life; the principal balance will be paid off at the liquidity event. Your team puts up $1 million of its own capital. One of your friends from the MBA program is a venture capitalist, and his firm agrees to invest $4 million at an expected 40% annual return for four years, at which time they expect a liquidity event in order to obtain their money and return back. Assume that in four years, BioBalance will have an EBITDA of $3.75 million. Include all your calculations to support each answer in order to earn full credit. Answers must be completed in sequence.
Required:
(a) Assume that in four years, BioBalance will be valued with an EBITDA enterprise exit multiple of 8.0. What will be the anticipated enterprise value of the firm at that point?
(b) Given the future value calculated in (a), what will be the equity value at that time?
(c) Because the VC firm expects a 40% compound return on its investment, what would be the dollar value of its portion of the equity value you calculated in (b)?
(d) Based on your answer in (c), what would be the amount of the equity up front that you would have to give up in order to obtain their original venture capital investment in BioBalance?
(e) What will be the dollar value of the management team’s original $1 million equity investment at the time of the liquidity event?