## Select an appropriate non-operating, financial variable (total assets, total stockholders equity, net fixed assets, etc.) for the company from which to calculate a value multiplier.

Assignment 3 – valuation using the perpetual growth method, value multipliers and cap rates

Part 1. Calculating capitalization rates

In this part, you calculate capitalization rates (“cap” rates) and value multipliers used to calculate horizon value, or to estimate current value of a company.

Select a non-financial company for which financial information is available for at least the three most recent years. Obtain financial statements the three most recent years. Use the company’s financial statements, together with other information described, to calculate the values indicated in questions 1-4.

Growing perpetuity based valuation multiplier and cap rate

1a. Estimate a growth rate for the company. Use average growth in any appropriate variable, such as sales (or total revenue), net income, operating income, dividends, etc.  Specify how you determine the growth rate.

1. Estimate the required return for the company using the capital asset pricing model if beta is available for the company (assume the risk free rate is 1.75% and the expected market return, 12.25%). If beta is not available, use the company’s average annual stock return for the last three years as the required return.
2. Use the answers to parts a and b to calculate the company’s cash flow multiplier based on the growing perpetuity valuation method
3. Convert the value in 1c to a cap rate.

Valuation multipliers and cap rates based on an operating variable

2a. Select an operating variable for the company (total sales, EBIT, operating cash flow, net income, etc.) from which to calculate a value multiplier

1. Calculate the value multiplier using the company’s current market capitalization and the most recent year’s value for that operating variable. [E.g., if you select net income as the operating variable, calculate the price to net income ratio, PE ratio. Be sure that the units for the company’s market capitalization and the selected operating variable are the same. If the income statement entries are in thousands, the market cap must also be in thousands.)
2. Convert the value in b to a cap rate.

Valuation multipliers and cap rates based on value of an asset

3a. Select an appropriate non-operating, financial variable (total assets, total stockholders equity, net fixed assets, etc.) for the company from which to calculate a value multiplier.

1. Calculate the value multiplier using the company’s current market capitalization and the most recent year’s value for that non-operating variable. [E.g., if you select total assets as the non-operating, financial variable, calculate the price to total asset ratio. (Be sure that the units for the company’s market capitalization and the non-operating variable are the same. If the balance sheet entries are in thousands, the market cap must also be in thousands.)
2. Convert the value in b to a “cap rate”.

Valuation multipliers and cap rates based on a non-financial asset

4a. Find the number of employees for the company for the most recent fiscal year.

1. Calculate the value multiplier using the company’s current market capitalization and the number of employees in part a. (Be sure that the units for the company’s market capitalization and the number of employees are the same. If the market capitalization is in millions, the number of employees must also be in millions.)
2. Convert the value in b to a capitalization rate.

Part 2. Using industry multipliers or cap rates to estimate the market value of a privately held company.

In this part, you use value multipliers and/or cap rates to estimate the current market value of a privately held company (the current value is the horizon value as of time 0).

Data for the private company is attached below.

5a. Use the multiplier from question 1 as a proxy for the industry multiplier to estimate the market value of the private company.

1. Use the cap rate from question 2 as a proxy for the industry cap rate to estimate the market value of the private company.
2. Use the multiplier or cap rate from question 3 as a proxy for the industry multiplier or cap rate to estimate the market value of the private company.
3. Use the multiplier or cap rate from question 4 as a proxy for the industry multiplier or cap rate to estimate the market value of the private company.
4. Briefly discuss the differences in values obtained in question 5 using the different methods, and based on the characteristics of the company you selected for part 1, indicate which value(s) are likely to be most accurate for a private company in the same industry.

Part 3. Horizon value

1. For one of the multipliers or cap rates from questions 1-4, explain how that multiplier or cap rate can be used to estimate the value of the private company as of 5 years from now.

 Income Statement (thousands) Total Revenue 3290 Cost of Revenue 2144 Gross Profit 1146 Operating Expenses Research Development 220 Selling General and Administrative 538 Non Recurring 11 Other 69 Total Operating Expenses 838 Operating Income or Loss 308 Income from Continuing Operations Total Other Income/Expenses Net 23 Earnings Before Interest and Taxes 285 Interest Expense 26 Income Before Tax 259 Income Tax Expense 104 Net Income 155

 Balance Sheet (thousands) Cash And Cash Equivalents 168 Net Receivables 252 Inventory 207 Other Current Assets 12 Total Current Assets 639 Property Plant and Equipment 1266 Goodwill 321 Intangible Assets 162 Other Assets 130 Total Assets 2518 Accounts Payable 176 Short/Current Long Term Debt 118 Other Current Liabilities 205 Total Current Liabilities 499 Long Term Debt 518 Other Liabilities 26 Deferred Long Term Liability Charges 26 Total Liabilities 1069 Common Stock 838 Retained Earnings 654 Other Stockholder Equity -43 Total Stockholder Equity 1449 Number of employees 18

 Statement of cash flows (thousands) Net Income 155 Operating Activities Depreciation 87 Adjustments To Net Income 51 Changes In Accounts Receivables 12 Changes In Liabilities -11 Changes In Inventories 4 Changes In Other Operating Activities -8 Total Cash Flow From Operating Activities 290 Investing Activities Capital Expenditures -22 Investments 12 Other Cash flows from Investing Activities -76 Total Cash Flows From Investing Activities -86 Financing Activities Dividends Paid -128 Sale Purchase of Stock -100 Net Borrowings 0 Other Cash Flows from Financing Activities 0 Total Cash Flows From Financing Activities -228 Effect Of Exchange Rate Changes -12 Change In Cash and Cash Equivalents -36