Overview
Complete the following problems from the textbook and submit your answers:
Chapter 13 – P13.4 - You are valuing a company as of the end of Year 0. The company is privately owned and 100% equity financed. The company's free cash flow for the current year, Year 0o, is $40 million, and management expects a free cash flow of $46.8 million next year (Year 1). Management expects the company's free cash flows to grow at a present value weighted average growth rate of 4%, using Year 0 as the base year. The company has one comparable company, which also uses all equity financing. The value of the comparable company is $1,283.3 million. Its free cash flow for the current year, Year 0, is $60 million, and management expects its free cash flow to bee $115.5 million in the following year, Year 1. Management believes that the two companies have the same cost of capital of 12%.
a. What is the free cash flow multiple of the comparable company based on its Year 0 and Year 1 free cash flows. Why are they different?
b. Value the privately owned company using the free cash flow market multiples of the comparable company based on both the Year 0 and Year 1 free cash flows. Why are the valuations different, and which one is more likely to be the better valuation?
c. Measure the value of the privately owned company using the discounted cash flow valuation method, and compare it to the free cash flow multiple valuations.
Chapter 15 - P15.1 - A group of managers is making an offer to purchase the company they manage - the T. Burrus Company. The company's current stock price is $12 per share, and the company has 250 million shares outstanding; the company has a current price-to-earnings equal to 14.37 and the firm-value-to-EBITDA multiple equals 5.25. Management owns 12.5 million shares of the outstanding stock. After considering the company's expected performance and alternative strategies to the LBO transaction (including alternative acquisition offers), the deal premium is set at 20%. The company has no convertible debt or convertible preferred stock, but it does have 50 million stock options outstanding, all with an exercise price equal to $7.20.
In addition to redeeming the existing stock and options, management and its financial sponsor will redeem all outstanding debt (par value of $300 million) and preferred stock (par value of $100 million) at their par values (all of which are equal to their book values). Initial fees will equal $161.1 million (3% for the debt financing, 1% to the sponsor, and 0.5% for other fees). These fees do not include fees for the revolver loan. The sponsor intends to finance this transaction by using $141 million in excess cash held by the company, issuing various debt securities equaling $3.19 billion, investing $750 million of its own equity, and having management invest $240.1 million in equity from rollover equity and new investment. The composition of the $3.19 billion in debt is $1.39 billion of 7 year, 7.0% senior bank debt; $880 million of 9-year, 11% subordinated unsecured debt; and $920 million of 10-year, 13% mezzanine debt, which has an "equity kicker" equal to 4% of the fully diluted post-LBO shares. In addition, the company is arranging a $400 million revolving line of credit that has a five year term, a 4% interest rate on the amount drawn, and a 0.5% annual fee on the total amount of the line of credit. Management has an "equity kicker" equal to 4.3% of the fully diluted post-LBO shares. The sponsor plans to use $200.0 million from the revolver to finance the transaction. The company will have 500 million post-transaction shares outstanding.
Calculate the purchase price of the equity and prepare a sources and uses schedule.