Corporate Finance Homework -
Consider the following data for MIGHTY enterprises, a mature British company related to tech developments in the defense industry with 85% of its sales in UK (all numbers in €):
Today is January 1, 2018 and the income statement for 2017 shows Revenues of 1.000.000€
Operating Margin at EBITDA level in 2017 was 600.000€
Applicable tax rate = 25%
Net Investment in working capital for 2018 is expected to amount to 5% of Revenues and CAPEX will be 150,000.
Depreciation in 2018 has been estimated at 50,000.
Evolution of the above magnitudes is expected to be the following:
- Revenues are expected to grow at a rate of 5% until 2022,
- EBITDA Margin is expected to remain constant at 60% Revenues
- Net Investment in working capital is expected to remain constant as a % of Revenues
- Both CAPEX and depreciation are expected to follow the same growth rates which are: 5% until 2020 included and 2,5% the two years after that.
- CAPEX Program will slow down in 2023 and will equal Depreciation forever.
With respect to the cost of capital, available data is the following:
- The firm's balance sheet shows 900,000 in financial debt which bears an interest rate of 4% and 1,200,000 in equity.
- Industry's average unlevered beta = 1.1
- Market risk premium = 7.0%
- Risk Free Rate = 1.5%
Assume permanent growth as 2.0% and Beta Levered = Beta Unlevered (1+D/E)
You are asked to forecast Cash Flows for 2018 - 2022, project the appropriate annuity and perform the corresponding firm valuation by DCF method.
Additionally, you can check the following information and use it to perform a relative firm valuation of MIGHTY.
|
Trading Comps
|
|
|
2017 Sales
|
% Sales outside UK
|
2017 EBITDA %
|
EV/EBIT
|
EV/EBITDA
|
|
JIOP Inc.
|
4,000,000
|
10%
|
45%
|
8,4
|
7,7
|
|
RETSA Inc.
|
1,250,000
|
3%
|
55%
|
8,5
|
7,9
|
|
NULPO Inc.
|
800,000
|
80%
|
60%
|
9,8
|
9,3
|
|
SERES Inc.
|
28,000,000
|
0%
|
60%
|
7,1
|
6,7
|
|
PLOTER Inc.
|
1,350,000
|
15%
|
70%
|
8,7
|
8,0
|
|
Average
|
|
|
|
8,50
|
7,92
|
|
Deal Comps
|
|
Transaction
|
Year
|
Deal Type
|
Price Paid
|
EBITDA Target
|
Price/EBITDA
|
|
SERES acquires UREF
|
2009
|
Distressed
|
5,750,000
|
1,025,000
|
5,6
|
|
PLOTER acquires VEDRE
|
2016
|
Strategic
|
4,570,000
|
460,000
|
9,9
|
|
RETSA acquires XESTU
|
2012
|
Market
|
45,000,000
|
5,700,000
|
7,9
|
|
JIOP acquires LOPERT
|
2015
|
Market
|
6,250,000
|
760,000
|
8,2
|
|
NULPO acquires BURTA
|
2017
|
Market
|
7,000,000
|
780,000
|
9,0
|
|
Average EBITDA Multiple
|
|
|
|
|
8,13
|
Questions to be specifically answered in one (1) pager. Also, send the excel spreadsheet with your calculations.
1. If you were a potential buyer of MIGHTY, how much would you be willing to pay for MIGHTY's shares? Justify your answer. Make any assumptions you may need to make and justify your answer as you understand you should justify it. The better justified, the more points you will get.
2. If you were the owner of 40% of MIGHTY, how much would you expect to receive for your shares? And if you were the owner of 55% of MIGHTY, would you expect to receive more or less than the estimated 55% Equity value of the company? Why?
3. Taking into account your valuation of MIGHTY Inc. and assuming that owners find such value as reasonable, how much should you invest in a share capital increase to end up owning 20% of the company? Justify your answer.