Cash & Valuation Practice Test
Cash & Valuation Practice Test Part 1 • • • •
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Cecilia sells tote bags to small retailers. At the beginning of her third year in business, she is dissatisfied with the amount of variability in her worker-driven process and decides to invest in a machine to automate the largest portion of it. The machine would cost $5 million up front and $1.50/unit in electricity. GAAP depreciation is 10 years with a salvage value of $250,000. Assume Cecilia’s operation runs for eight hours a day, five days a week, 52 weeks per year. The costs associated with Cecilia’s bag business are as follows: o Workers are paid by the hour at a rate of $11. There have been 20 workers in the past and there will be 5 going forward. o Fabric costs $7/unit. o The rent on the factory is $1600/month. o Utilities are $300/month. o A single salesperson is paid by commission at 5% of the sale price. o Shipping is in batches of 100 and is $12.50 per shipment. o Cecilia takes a salary of $50,000/year. o Embellishments cost $5/unit. o Packaging is $1/unit. Each bag is priced at $40. Cecilia sold 49,400 units in her first year of business and 60,840 units in her second year. She believes she can continue at this rate. Assume a tax rate of 38%. Cecilia’s accounts receivable are 60% of her sales and her accounts payable are 30 days of fabric and embellishments. Her inventory is as follows: o 10 days of raw materials. o 60 units of WIP with an average cost of $18. o 3 days of finished goods with a cost of $20/unit.
1. Build an unlevered Free Cash Flow to the Firm model for Years 1-5 of the business. 2. What is the sustainable growth rate for each year? 3. What is the Intrinsic Firm Value? (Assume a discount rate of 15% and an EBITDA multiple of 5).
Copyright 2014 by the Acton School of Business. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means without the written permission of Acton School of Business.
This curriculum is used in its entirety at the Acton School of Business, based in Austin, Texas, an intense one year program taught exclusively by successful entrepreneurs. To learn more, visit www.actonmba.org. 10/2014
Part 2 • •
Cecilia will need to take on debt to invest in the new machine at the beginning of Year. 3. The bank will loan her $5 million over 10 years with 11% interest.
4. The bank wants proof that the business will generate enough cash to cover the debt service. Build the model that illustrates this. 5. What is the intrinsic value of the equity with this loan and investment?
Part 3 •
Cecilia has collected information on comparable companies to estimate a market value for her firm. o Private Company A just sold for $7.5 million with an EBITDA of $1.5 million. It has debt of $3 million. o Private Company B has $7 million in debt and sold for $15.62 million. Its EBITDA is $4.4 million. o Public Company C has debt of $9 million and its stock sells for $15.22/share. There are 25 million shares outstanding. EBITDA is 25.60. o Public Company D has an EBITDA of $15.10 million, debt of $16 million, 10.1 million shares outstanding, and a stock price of $9.04/share.
6. What is the market price of the tote bag firm? What is its equity?
Part 4 •
Assume that Cecilia put in $10,000 cash at the start of the business.
7. Create a complete set of pro formas for the first five years of the business.
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Cecilia sells tote bags to small retailers. At the beginning of her third year in business, she is dissatisfied with the amount of variability in her worker-driven process and decides to invest in a machine to automate the largest portion of it. The machine would cost $5 million up front and $1.50/unit in electricity. GAAP depreciation is 10 years with a salvage value of $250,000. Assume Cecilia’s operation runs for eight hours a day, five days a week, 52 weeks per year. The costs associated with Cecilia’s bag business are as follows: o Workers are paid by the hour at a rate of $11. There have been 20 workers in the past and there will be 5 going forward. o Fabric costs $7/unit. o The rent on the factory is $1600/month. o Utilities are $300/month. o A single salesperson is paid by commission at 5% of the sale price. o Shipping is in batches of 100 and is $12.50 per shipment. o Cecilia takes a salary of $50,000/year. o Embellishments cost $5/unit. o Packaging is $1/unit. Each bag is priced at $40. Cecilia sold 49,400 units in her first year of business and 60,840 units in her second year. She believes she can continue at this rate. Assume a tax rate of 38%. Cecilia’s accounts receivable are 60% of her sales and her accounts payable are 30 days of fabric and embellishments. Her inventory is as follows: o 10 days of raw materials. o 60 units of WIP with an average cost of $18. o 3 days of finished goods with a cost of $20/unit.
1. Build an unlevered Free Cash Flow to the Firm model for Years 1-5 of the business. 2. What is the sustainable growth rate for each year? 3. What is the Intrinsic Firm Value? (Assume a discount rate of 15% and an EBITDA multiple of 5).
Copyright 2014 by the Acton School of Business. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means without the written permission of Acton School of Business.
This curriculum is used in its entirety at the Acton School of Business, based in Austin, Texas, an intense one year program taught exclusively by successful entrepreneurs. To learn more, visit www.actonmba.org. 10/2014
Part 2 • •
Cecilia will need to take on debt to invest in the new machine at the beginning of Year. 3. The bank will loan her $5 million over 10 years with 11% interest.
4. The bank wants proof that the business will generate enough cash to cover the debt service. Build the model that illustrates this. 5. What is the intrinsic value of the equity with this loan and investment?
Part 3 •
Cecilia has collected information on comparable companies to estimate a market value for her firm. o Private Company A just sold for $7.5 million with an EBITDA of $1.5 million. It has debt of $3 million. o Private Company B has $7 million in debt and sold for $15.62 million. Its EBITDA is $4.4 million. o Public Company C has debt of $9 million and its stock sells for $15.22/share. There are 25 million shares outstanding. EBITDA is 25.60. o Public Company D has an EBITDA of $15.10 million, debt of $16 million, 10.1 million shares outstanding, and a stock price of $9.04/share.
6. What is the market price of the tote bag firm? What is its equity?
Part 4 •
Assume that Cecilia put in $10,000 cash at the start of the business.
7. Create a complete set of pro formas for the first five years of the business.
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