Your private equity company, Blackstone, is considering the acquisition of Chewco. In the following pages, you will consider some of the available information for Chewco to determine an appropriate valuation to be used in your purchase decision.
The next page of the exam has information about the financial statements for Chewco and some data for comparable companies.
(Provide enough information that we can understand how you calculated your answers.)
2015 Income Statement and Balance Sheet Data for Chewco Corporation
|
Income Statement ($ 000)
|
Year 2015
|
|
Sales
|
150000
|
|
Cost of goods sold
|
|
|
Raw materials
|
-32000
|
|
Direct labor costs
|
-36000
|
|
Gross profit
|
82000
|
|
|
|
|
Sales and marketing
|
-22500
|
|
Administrative
|
-27000
|
|
EBITDA
|
32500
|
|
|
|
|
Depreciation
|
-11000
|
|
EBIT
|
21500
|
|
|
|
|
Interest expense (net)
|
-150
|
|
Pretax income
|
21350
|
|
Income tax (tax rate 35%)
|
-7472.5
|
|
Net income
|
13877.5
|
|
Balance Sheet ($ 000)
|
Year 2015
|
|
Assets
|
|
|
Cash and equivalents
|
25328
|
|
Accounts receivable
|
36986
|
|
Inventories
|
12330
|
|
Total current assets
|
74644
|
|
|
|
|
Property, plant and equipment
|
99000
|
|
Goodwill
|
0
|
|
Total assets
|
173644
|
|
|
|
|
Liabilities and Stockholder's Equity
|
|
|
Accounts payable
|
9308
|
|
Debt
|
9000
|
|
Total liabilities
|
18308
|
|
Stockholder's equity
|
155336
|
|
Total Liabilities and equity
|
173644
|
|
Ratio
|
Oldco
|
Middleco
|
Ancientco
|
|
P/E
|
19.2
|
15.1
|
27.3
|
|
P / Sales
|
1.7
|
1.3
|
2.6
|
|
P / EBITDA
|
11.6
|
9.1
|
14.7
|
2(a). What range for the market value of equity for Chewco is implied by the range of P/E multiples for the comparable firms of Oldco, Middleco and Ancientco.
•The low price implied by the comparable P/E ratios is .
•The high price implied by the comparable P/E ratios is .
2(b). Using the average Price /Sales ratio of the comparable firms, estimate Chewco's value of equity.
•The average P/Sales ratio is .
•The estimated equity value for Chewco based on that average ratio is .
2(c). How would your analysis differ if you were computing equity value based on EV / EBITDA?
2(d). Briefly summarize the strengths and weaknesses of valuation with ratio analysis.
2(e). It is January 1 2016. Blackstone believes that it can improve the performance of Chewco. It has estimated that under its management, the year-end free cash flows will be as follows:
In year 2016, FCF = 16935
In year 2017, FCF = 20525
In year 2018, FCF = 24335
From then on, Blackstone estimates that FCF will grow at a perpetual rate of 4%.
Blackstone believes that the cost of capital for projects of similar risk is 13.1% and will finance the project with all equity. The tax rate is 35%.
Use discounted cash flow methodology to determine the value of Chewco as of January 1 2016:
•What is the present value of the year-end cash flows in years 2016, 2017 and 2018.
•What is the terminal value?
•What is the present value of the terminal value?
•What is the overall value of the company using DCF analysis?
•How does this valuation compare to your valuation based on ratio analysis?