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1, FORCASTING PRO FORMA FINANCIAL STATEMENTS: PREPARE A PRO FORMA INCOME STATEMENT AND BALANCE SHEET FOR WEBB ENTERPRISES, FOUND BELOW, AND ESTIMATE THE FIRM?S FCF FOR 2011. WHERE REVENUES ARE EXPECTED TO GROW BY 20% IN 2011. MAKE THE FOLLOWING ASSUMPTIONS IN MAKING YOUR FORECAST OF THE FIRM?S BALANCE SHEET FOR 2011: A. The income statement expenses are a constant percent of revenues except for interest, which remains equal in dollar amount to the 2010 level, and taxes, which equal 40% of earnings before taxes. B. The cash and marketable securities balance remains equal to $500, and the remaining current asset accounts and fixed assets increase in proportion to revenues for 2010. C. Net property, plant, and equipment increase in proportion to the increase in revenues. D. Accounts payable increase in proportion to firm revenues. E. Owners? equity increases by the amount of firm net income for 2011 (no cash dividends are paid). F. Long term debt remains unchanged, and short term debt changes in an amount that balances the balance sheet. BALANCE SHEET 2010 CASH AND MARKETABLE SECURITIES $ 500 ACCOUNTS RECEIVABLE 6,000 INVENTORIES 9,500 CURRENT ASSETS 16,000 NET PROPERTY PLANT AND EQUIPMENT 17,000 TOTAL 33,000 ACCOUNT PAYABLE 7,200 SHORT TERM DEBT 6,800 CURRENT LIABILITIES 14,000 LONG TERM DEBT 7,000 TOTAL LIABILITIES 21,000 TOTAL OWNER?S EQUITY 12,000 TOTAL LIABILITIES AND OWNERS? EQUITY 33,000 INCOME STATEMENT 2010 REVENUES 30,000 COST OF GOODS SOLD (20,000) GROSS PROFIT 10,000 OPERATING EXPENSES (8,000) NET OPERATING INCOME 2,000 INTEREST EXPENSE (900) EARNINGS BEFORE TAXES 1,100 TAXES (400) NET INCOME 700 2, NORMALIZING EBITDA: Jason Kidwell is considering whether or not to acquire a local toy manufacturing company, Toys?n Things Inc. The company?s annual income statements for the last three years are as follows: 2010 2009 2008 REVENUES 2,243,155 2,001,501 2,115,002 COST OF GOODS SOLD (1,458,051) (1,300,976) (1,374,751) GROSS PROFITS 785,104 700,525 740,251 DEPRECIATION AND ADMINISTRATIVE EXPENSES (574,316) (550,150) (561,500) NET OPERATING INCOME 210,789 150,375 178,751 A. Jason has learned that small private companies such as this one typically sell for EBITDA multiples of three to four times. Depreciation expense equals $50,000 per year. What value would you recommend Jason put on the company? B. The current owner of Toys?n Things indicated to Jason that he would not take less than five times 2010 EBITDA to sell out. Jason decides that, based on what he knows about the company, the price could not be justified, however, upon further investigation, Jason learns that the owner?s wife is paid $100,000 a year for administrative services that Jason thinks could be done by a $50,000 per year assistant. Moreover, the owner pays himself a salary of $250,000 per year to run the business, which Jason thinks is at least $50,000 too high based on the demands of the business. In additions, Jason thinks that by outsourcing raw materials to Asia, he can reduce the firm?s cost of goods sold by 10%. After making adjustments for excessive salaries, what value should Jason place on the business? Can Jason justify the value the owner is placing in the business? 3, ENTERPRISE VALUATION: In the summer of 2010, smidgeon industries was evaluating whether or not to purchase one of its suppliers, the supplier, Carswell Manufacturing, provides Smidgeon with the raw steel Smidgeon uses to fabricate utility trailers. One of the first things that Smidgeon?s management did was to forecast the cash flows of Carswell for the next five years: Year cash flows 1 1,200,000 2 1,260,000 3 1,323,000 4 1,389,150 5 1,258,608 Next, Smidgeon?s management team looked at a group of similar firms and estimated Carswell?s cost of capital to be 15%. Finally, they estimated that Carswell would be worth approximately six times its year 5 cash flow in fine years. a. What is your etimate of the enterprise value of Carswell? b. What is the value of the equity of Carswell if the acquisition goes through and Smidgeon borrows $2,4 million and finances the remainder using equity? 4, VALUING AND AMERIAN OPTION J&B Drilling Company has recently acquired a lease to drill for natural gas in a remote region of southwest Louisiana and southeast Texas. The area has long been known for oil and gas production, and the company is optimistic about the prospects of the lease. The lease contract has a three-year life and allows J&B to begin exploration at any time up until the end of the three-year term. J&B?s engineers have estimated the volume of natural gas they hope to extract from the leasehold and have placed a value of $25 million on it, on the condition that explorations begin immediately. The cost of developing the property is estimated to be $23 million (regardless of when the property is developed is developed over the next three years). Bases on historical volatilities in the returns of similar investments and other relevant information, J&B?s analysts have estimated that the value of the investment opportunity will evolve over the next three years. The risk-free rate of interest is currently 5%, and the risk-neutral probability of an uptick in the value of the investment is estimated to be 46.26%. A. Evaluate the value of the leasehold as an American call option. What is the Lease worth today? B. As one of J&B?s analysts, what is your recommendation as to when the company should drilling?,i want to know if my assignment is still in evaluation stage or its being under working process, thanks


Paper#11939 | Written in 18-Jul-2015

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