Business analysis and valuationWord格式.docx

Business analysis and valuationWord格式.docx

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曾毅茵20090200995

胡嘉瑜20090200896

李秋燕20090201078

张皓禹20090201017

练鹏20090201040

1.Introduction

CharlieCarltonwouldhavetodecidewhetherornottopay$2500000toJimMillerforMiller’shalfownershipintheCarltonPolishCompany.

Thiscompanywasfoundedin1883byCharlesCarlton,Sr.andthecompanywasthefirstmanufacturerofwaxestobeincorporatedintheUnitedStates.TheproductwassosuccessfulthatthenameCarlton’swaxbecameagenericnameforpastewax.ThemanufacturingprocessatCarltonwasquitesimpleandCarltonhadanexcellentreputationforqualitycontrol.Moreimportantly,laborrelationswereconsideredexcellent.However,inthesameindustry,therewasalargecompetitor,S.C.Johnson&

Sons,whichhadanestimatedsalesvolumeof$75million.TheshareheldbyCarltonwasunder3%.

2.AssumptionsandConditions

a.WestartthispaperwiththeDiscountedCashFlowvaluationmethod.Thestartingpointofthecompanyvaluationwasbasedontheyear1983.

b.Thesustainablegrowthrategisquitelowandcouldbeseenaszero.Thus,weusetheinflationrateasthesustainablegrowthrate.

c.Therisk-freereturnratecouldbeseenasthelong-termgovernmentbondsinterestrate,10.1%.

d.Themarketreturnrateisreferredtothestockpriceindexinthatyear.Weusethelong-termAAAcorporatebondsinterestrate,11.7%,asthemarketreturnrate.

e.Becausetheinterestrateofthebankloanfor5-yearwas13.5%,thisaverageinterestratewasseenasthecostofdebt（rd）.

f.TheD/EratiowastheaverageofthefourcompanyandthedatawaschosenfromtheExhibit2.

TheCarltonPolishCompanyhadneverreportedalossinits100plusyearhistory.Salesin1982were$9302702andnetincomewas$276000.

a.Salarylevel.Payingmanagerexcessivepaymentsignifiespayingtoomuchrevenuetoindividual,whichwillcausethisamountofcapitaldisappearintheassetpartofthebalancesheet.Anamountofassetsofapproximate$500000arereducedintheassetchart.Accordingly,anamountofequityisreducedof$500000.

AdjustmentsforDec.31,1982

（$000）AssetsLiabilities&

Equity

BalanceSheet

Cash+$500

DeferredTaxes+$284.5

Shareholder’sEquity+$215.5

IncomeStatement

SG&

A-$500

Tax+$284.5

Netincome+$215.5

b.Long-termdebtandshareholders’equity.Purchasethesharesofthefamilybybusingthefundraisedbyissuingsecuritiesmightcauseachangeofthebalancesheet,byshowingaincreaseof$1.228millionofitslongtermdebtandadecreaseofitsshareholder'

sequityabout$1.228million.

AdjustmentsforDec.31,1982

（$000）AssetsLiabilities&

Balancesheet

Interestpayable+$16.9

Long-termdebt+$1300

Shareholders’equity-$1316.9

c.Leaseexpense.Becausethenetpresentvalueofthefutureleaseobligationswas$1.6millionandthiswouldincreasetheassetandthelong-termdebt.Buttheothercurrentliabilitiesannualgrowthwas25.5%andtherentalandleaseexpensewas$343000,thechangebetweenthemwas$87000.Ascanbeseenfromthefootnotes,theamountin1983was$287101.Weusethisnumbertominus$87000equatestoabout$20000.

Netplantandequipment+$1600

Othercurrentliabilities+$87

Long-termdebt+$1600-$87

Incomestatement

A-$200

Interestexpense+$200

d.Legalexpenses.ThelegalexpensescouldnotberegardedastheSG&

A.Thelegalexpensesbelongtotheoutsideexpensesandshouldnotbeincludedintotheoperatingexpenses.

Balancesheet

A-$100

Netincome+$100

e.Internalrevenueserviceaudit.Inearly1983,theIRSandCarltonPolishhavereachedanagreementcallingforthecompanytomakeaone-timeadditionalpaymentof$115000intaxes.However,thecompanyrecordedin1982achangetoretainedearningsfor$115000.Thesameamountwasalsoaddedtocurrentliabilities.Thischangewasadjustedwithinthebalancesheet.

Incomestatement

Taxes+$115

Netincome-$115

f.Excesscash.AsofDecember31,1982,excesscashwasestimatedat$250000.Ofthisamount,$115000wouldbeusedtopaytheIRSasdescribedinitemeabove.Therestcouldbeusedtohelpfinancethebuyoutofthepartner’sshares.

Cash+$250

Deferredtax-$115

Shareholders’equity+$135

4.CarltonPolishCompanyValuation

Step1:

1.D/Eratioofindustry=averagedebtofthefourselectedcompanies/averageequityofthefourselectedcompanies

=[1/4（366+79+218+42）]/{1/4[114（1+34.4%）+25.3（1-9.2%）+5.3（1+35.6%）+1.8]}=46.2938/176.25MM

2.D/E=D/Eratioofindustry,D——debtofthetargetcompany,E——equityofthetargetcompany

D=1228000（1+16.3%）=1428164,1428164/E=46293800/176250000,E=5437313

Rf=10.1%Rm=11.7%β=1/4（1.10+0.85+0.80+0.55）=0.825

Ke=Rf+β（Rm－Rf）=10.1%+0.825（11.7%-10.1%）=11.42%

Kd=13.5%,t=52%

3.WACC＝Ke×

E/（D+E）+Kd（1-t）×

D/（D+E）

=11.42%×

5437313/（5437313+1428164）+13.5%（1-52%）×

1428164/（5437313+1428164）=10.39%

Assumptions:

1.Netsalesincrease10%peryear

2.Thecompanyleasestherealestateandtheleasesareclassifiedasoperatingleases.Theleasesexpirein1996.Theleasepayments,alsotherentalexpensearerequiredasfollowing:

Year1983is$287,000,andtheother4yearsarethesameas$250,000.

3.Weassumetheexecutivesalariesis450,000in1983,andduringthefollowingyear,itwillraise10%peryear.

Year

Actual

1982

Proforma

1983

1984

1985

1986

Proforma

1987

Sales

9,303

10,233

11,257

12,382

13,621

14,983

A/salesratio（%）

24.3

A

3,055

2,486

2,735

3,008

3,309

3,640

COGS/sales（%）

54.8

Costofgoodssold

5,445

5,612

6,173

6,791

7,470

8,217

4.Inyear1982,rentalexpenseandexecutivesalariesareincludedincostofgoodssoldandSG&

Awhileexcludedinthefollowingyears.SointhefollowingyeartheSG&

A/salesratiois24.3%andtheCOGS/salesratiois54.8%.

5.WeassumethatthepurchasepriceforJimMiller’sone-halfinterestinthecompanyis$2,500,000.JimMilleragreestoacceptanotewithavalueof$1,000,000.Andtheinterestrateforthe15-yearsellernoteis14%.Sotheinterestexpenseforthesellernoteis$140,000peryear.Butafter1985,thecompanybeginstomakeaamortizationof$83,000.

InterestandAmortizationScheduleofsellernote

Interest（$000）

140

128

Amortization（$000）

83

Remainingprinciple（$000）

1,000

917

834

6.Thecompanyborrows$1,365,000fromthebank.Itisa5-yearbankloanwiththeinterestof13.5%.

InterestandAmortizationScheduleoftheBankLoan

Interest（＄000）

184

147

111

74

37

Amortization（＄000）

273

Remainingprinciple（＄000）

1,092

819

546

7.Thetaxratein1982is56.9%.Butthetaxratechangesto52%after1982.

8.Theforecastfornetworkingcapital:

Currentasset/sales（%）

25.8

23.1

Currentliabilities/sales（%）

10.9

9.0

Networkingcapital/sales（%）

14.9

14.1

Networkingcapital（$000）

1,384

1,440

1,584

1,742

1,917

2,108

9.Weassumethatthetotalnetfixedassets/salesratiois1.7%allthetime.Sowecancalculatethetotalnetfixedassetswiththehelpoftheknownsales.

Freecashflowtothefirm=Netoperatingprofitaftertax-changeinnetworkingcapital-changeinnetlong-termassets

Netoperatingprofitaftertaxtable:

Interestincome

40

Interestexpense

179

480

437

393

347

286

netinterestexpense

139

Taxes

79

250

227

204

180

149

Netoperatingprofitaftertax

60

230

210

189

167

137

Changeinnetworkingcapitalandnetlong-termassetstable:

1981

Networkingcapital

1,225

Changeinnetworkingcapital

__

159

56

144

158

175

191

Netlong-termassets

222

162

178

196

216

237

261

Changeinnetlong-termassets

（60）

16

18

20

21

24

TheCarltonPolishCompany----ProformaFCFF（$000）

Netsales

10,233

Rentalexpense

343

287

Sel