ACCT 4337/FIN 4337 Business Valuation

Semester Project and Course Content

This represents a description of the semester project and a description of the content of this course.  We will discuss this content in class, become familiar with it through homework and in-class practice test, use it in the case, the project and it will be the subject of examinations.

The semester project is to form working groups of four or five students (I will assign those who do not have a group) to determine the equity value of a company to be assigned, (the “Company”).  You are to value the equity of Micropac Industries, Inc. (OTCMKTS: MPAD) as if it were privately held.  The Company’s stock is traded publically and it was chosen because its information is readily available.  Your conclusion will be that the value is _____________________ or between ________________ and _________________, not that its market value is understated or overstated.  Your conclusion must be independent of the quoted market value.

View this company as if you are evaluating it as an acquisition of 100% of the common stock outstanding, not as the price of one share of stock.  You are to consider this company as if you were making a long-term investment by buying the whole company, not a block of its stock.

Each group or team will be given an overall grade and each team member will be given an individual grade based on their fellow team member’s evaluations of their contribution and teamwork for the project and the case.

Planning period – length and rate of growth.  You are to determine whether this company will grow at a different rate of growth than its perpetual rate of growth.  If so, select a rate of growth for “planning periods” or a period of time during which this company would be expected to grow at a rate higher than the perpetual growth rate or the overall rate of growth rate of the economy.  For example, a target company may be expected to grow at 7% for 5 years and at the rate of growth of the overall economy or its industry thereafter.   This rate of growth should be based on your research into the overall economy and political climate, this industry, stock research analyst’s projections and investments the company is making in capital goods and working capital for the future.


How many 3 to years 5

Perpetual growth phase.  You are to select a rate of growth in perpetuity, which could be equal to, more than or less than the growth rate of the economy or even zero or negative.  This rate should be based on your research of the U.S. economy and the particular industry sector of ATRI.

Financial statement forecast.  Forecast a balance sheet and a statement of income for the planning periods described above, based on a study of the historical financial statements of the Company, your research described above and the forecasting techniques we will learn this semester.

Free cash flow forecast.  Forecast the cash flow as “Free Cash Flow to the Firm”, meaning the cash flow to all components of the capital structure.  Use this formula:

EBIT (Earnings before interest and taxes)

– Tax (EBIT X marginal tax rate)

= NOPAT (net operating income after tax)

+ Depreciation

  • CAPEX (Capital expenditures)
  • +NWC (Increase in net working capital)(*)

= FCFF (Free cash flow to the firm)


(*) Net working capital will exclude both non-operating cash and interest bearing debt.

Select a discount rate using WACC.  Weights and costs of elements of the capital structure.   Determine capital structure weights using values of components of the capital structure.

  • Interest bearing debt classified as a current liability. Unless circumstances would indicate otherwise, use book value and stated interest rate less tax effect. Rate (1-T).
  • Long-term debt. If the company has long-term debt, create a synthetic market yield-to-maturity by calculating and interest coverage ratio (EBIT/Interest expense) and referring to the Damodaran Ratings, Interest Coverage Ratio and Default Spreads table to obtain a default spread to add to the comparable Treasury Rate.  Give effect to taxes.  Rate (1-T). Use the synthetic market yield-to-maturity to determine market value for market structure weights.
  • Preferred stock.
  • If publically traded, use market value and determine cost using D/Po.
  • If not publically traded, and not significant to capital structure, use book value and dividend rate. If significant, then attempt to create a synthetic market value and cost by comparing to similar issues that trade more frequently.
  • Common stock. Use current market capitalization as an estimate.  Determine cost using the Capital Asset Pricing Model (CAPM) [R(F) + b(MRP)].  Use the current 10 Year Treasury rate for R(F), obtain MRP from the Damodaran web site,  create a synthetic b by (1) selecting betas of comparable industry peers, deleverage those betas using the formula (see formula posted on elearning), average the deleveraged betas, re leverage the average beta based on the Company’s debt/equity ratio and marginal tax rate.  Remember we are assuming the Company is private.

Compute WACC [(wt of debt x cost) + (wt of preferred x cost) + (wt of common x cost)]

Discount the planning period FCF’s to PV using WACC.  Each FCF/(1+WACC)t.

Determine terminal value using DCF.  Take the FCF from the last planning period, convert it to “next year’s FCF” by FCF (1 + perpetual growth rate) then dividing by (Discount rate – perpetual growth rate).  FCF (1 + Gp)/(WACC – Gp).

Calculate Enterprise Value using DCF – Sum the PV’s (Discounted Planning Period PV’s and the TV PV).

Calculate Equity Value – (Enterprise Value + Cash – Interest Bearing Debt).

In the event that your FCFF is negative because of extensive investments in CAPEX or NWC, and those investments are financed by issuing debt or equity, then you may want to consider using FCFE and discounting those cash flows with cost of equity rather than WACC.  Please discuss this with me before proceeding.

Determine the Enterprise Value using relative valuation (Use CapIQ for comparables). 

  • Selection a valuation ratio (Value relative to EBIT, EBITDA, FCF, PE, PEG, BV, Sales) and justify the selection. You may decide to use more than one ratio.
  • Determine a group of comparable industry peers (preferably of similar size, debt/equity ratios, and operating leverage).
  • Average the groups ratios to market value (i.e. MV/EBIT or MV/EBITDA, etc.) to obtain multiples (i.e. MV is 5 X EBIT, 2 X BV, 1.25 X Sales, etc.).
  • Apply the average multiple to EBITDA to the Company’s EBITDA or multiple to EBIT to the Company’s EBIT or multiple to the valuation ratio you have chosen.
  • Determine an appropriate illiquidity discount rate, based on the Company’s size, debt/equity ratio, leverage ratio, industry, etc. We understand this will be subjective.
  • Apply the illiquidity discount ratio to the terminal value of a comparable public company to determine the private company value.

Realize that some of the valuation ratios are for Enterprise Value (EBITDA, for instance) and some are for Equity Value (PE for instance).  You want to end up with the value of 100% of the common stock, or Equity Value.  If you use an Equity Value valuation ratio, then your result will be Equity Value.  If you use an Enterprise Value valuation ratio, then you will need to adjust Enterprise Value by added cash and deducting interest bearing debt.

I will need to be able to extract several items from your report for the purposes of comparison among the various reports, for example:


Bottom Up Beta

Number of planning periods

Growth rate for planning periods

Perpetual growth rate


Illiquidity discount

Valuation ratio used (EBITDA, etc.)

Equity Value – Using DCF

Equity Value – Using relative valuation

The report should be word processed and the exhibits should be in Excel.

Here is a sample table of contents:

  1. Overview of the assignment, team members
  2. Overview of the Company( Micropac Industries) including analysis of historical income and cash flow. Make sure to include that We are forecastings the financial statements ballace sheet, Income statement and statement of cashflow alswo we are calculating WACC all these items are forecasted for 3 to 5 year at growth rate of 4.5% at 6% means

You will have to talk about the numbers of planning period and growth rate for planning period.

Also here is the list of 10k of the cpmany where you can find what s the company about or other stuff

  1. Discussion of the Company’s industry with focus on outlook and competitors( Emcore corporation, Intest corporation and Applied Optoelectronics, Inc.
  2. Valuation of the Company. This is the guts of the report.  In discounted cash flow valuation, discuss your reasons for major assumptions for growth, WACC, etc.  You need to refer to the company, its competitors and the industry as necessary to justify your assumptions.  Be concise, use bullet point lists rather that long essays and refer to excel schedules in appendix as needed.  Same for market comparable and control transactions.  Discuss how comps were selected.
  3. Explain your conclusion of value.

Six to eight pages, not including exhibits should be plenty but use more if needed.  No clip art needed just well formatted text and exhibits.  Style as well as substance count, just as in the real world.  Each team will make a brief presentation of their conclusions to the class (and instructor) on the due date of November 27 and 29, 2018.

I am happy to help.  Each team will be given an overall grade and a grade based on evaluations by team members of each member’s participation and input.

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