Business analysis and valuation.docx

Business analysis and valuation.docx

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Businessanalysisandvaluation

Businessanalysisandvaluation

---------theCarltonPolishCompany

Catalog

1.Introduction………………………………………………2

2.AssumptionsandConditions…………………………….2

3.FinancialPerformance&AdjustedFinancialStatements

……………………………………………………………..2

4.CarltonPolishCompanyValuation……………………..4

Step1:

Calculatingtheweightedaveragecostofcapital（wacc）.

Step2:

Forecastfreecashflowstocapitalfrom1983to1987.

Step3:

Thefirmvaluecouldbeestimatedusingthediscountedabnormalearningsmethod.

5.WaysofraisingmoneytoJimMiller…………………….8

6.Conclusion…………………………………………………8

（class:

Finance091）

Members:

ID

袁巧珍20090200938

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.

3.FinancialPerformance&AdjustedFinancialStatements

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&Equity

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.

AdjustmentsforDec.31,1982

（$000）AssetsLiabilities&Equity

Balancesheet

Netplantandequipment+$1600

Othercurrentliabilities+$87

Long-termdebt+$1600-$87

Incomestatement

SG&A-$200

Interestexpense+$200

d.Legalexpenses.ThelegalexpensescouldnotberegardedastheSG&A.Thelegalexpensesbelongtotheoutsideexpensesandshouldnotbeincludedintotheoperatingexpenses.

AdjustmentsforDec.31,1982

（$000）AssetsLiabilities&Equity

Balancesheet

SG&A-$100

Netincome+$100

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

AdjustmentsforDec.31,1982

（$000）AssetsLiabilities&Equity

Incomestatement

Taxes+$115

Netincome-$115

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

AdjustmentsforDec.31,1982

（$000）AssetsLiabilities&Equity

Balancesheet

Cash+$250

Deferredtax-$115

Shareholders’equity+$135

4.CarltonPolishCompanyValuation

Step1:

Calculatingtheweightedaveragecostofcapital（wacc）.

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%

Step2:

Forecastfreecashflowstocapitalfrom1983to1987.

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

Proforma

1984

Proforma

1985

Proforma

1986

Proforma

1987

Sales

9,303

10,233

11,257

12,382

13,621

14,983

SG&A/salesratio（%）

24.3

24.3

24.3

24.3

24.3

24.3

SG&A

3,055

2,486

2,735

3,008

3,309

3,640

COGS/sales（%）

54.8

54.8

54.8

54.8

54.8

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

Year

1983

1984

1985

1986

1987

Interest（$000）

140

140

140

140

128

Amortization（$000）

0

0

0

83

83

Remainingprinciple（$000）

1,000

1,000

1,000

917

834

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

InterestandAmortizationScheduleoftheBankLoan

Year

1983

1984

1985

1986

1987

Interest（＄000）

184

147

111

74

37

Amortization（＄000）

273

273

273

273

273

Remainingprinciple（＄000）

1,092

819

546

273

0

7.Thetaxratein1982is56.9%.Butthetaxratechangesto52%after1982.

8.Theforecastfornetworkingcapital:

Year

1982

1983

1984

1985

1986

1987

Currentasset/sales（%）

25.8

23.1

23.1

23.1

23.1

23.1

Currentliabilities/sales（%）

10.9

9.0

9.0

9.0

9.0

9.0

Networkingcapital/sales（%）

14.9

14.1

14.1

14.1

14.1

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:

Year

Actual

1982

Proforma

1983

Proforma

1984

Proforma

1985

Proforma

1986

Proforma

1987

Interestincome

40

0

0

0

0

0

Interestexpense

179

480

437

393

347

286

netinterestexpense

139

480

437

393

347

286

Taxes

79

250

227

204

180

149

Netoperatingprofitaftertax

60

230

210

189

167

137

Changeinnetworkingcapitalandnetlong-termassetstable:

Year

Actual

1981

Actual

1982

Proforma

1983

Proforma

1984

Proforma

1985

Proforma

1986

Proforma

1987

Networkingcapital

1,225

1,384

1,440

1,584

1,742

1,917

2,108

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）

Year

Actual

1982

Proforma

1983

Proforma

1984

Proforma

1985

Proforma

1986

Proforma

1987

Netsales

9,303

10,233

11,257

12,382

13,621

14,983

Costofgoodssold

5,445

5,612

6,173

6,791

7,470

8,217

Rentalexpense

343

287

250

250

250

250

Sel