finance question

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20210321200546solution_format_2.xls

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Q1

FIRM DATA
		Year	2019	2020	2021	2022	2023	2024
Sales Data		Growth/Yr
1	Market Size (000 units)	6.0%	20,000.00	21,200	22,472	23,820	25,250	26,765
2	Market Share	1.0%	10.0%	11.0%	12.0%	13.0%	14.0%	14.0%
3	Ave. Sales Price ($/unit)	2.00%	50.00	51.00	52.02	53.06	54.12	55.20
4	Sales Revenue ($000s)		100,000	118,932	140,279	164,309	191,316	206,851
Operating Expense & Tax Data
5	Gross Margin		54.7%	53.0%	53.0%	53.0%	53.0%	53.0%
6	Sales & Marketing (% sales)		15.0%	16.5%	18.0%	19.5%	20.0%	20.0%
7	Administration (% sales)		18.0%	15.0%	15.0%	14.0%	13.0%	13.0%
8	Tax Rate		35.0%	35.0%	35.0%	35.0%	35.0%	35.0%
		Year	2019	2020	2021	2022	2023	2024
Fixed Assets and Capital Investment ($000s)
1	Opening Book Value		60,167	60,000	58,500	57,150	73,935	77,342
2	Capital Investment		6,500	5,000	5,000	25,000	12,000	8,000
3	Depreciation		(6,667)	(6,500)	(6,350)	(8,215)	(8,594)	(8,534)
4	Closing Book Value		60,000	58,500	57,150	73,935	77,342	76,807
FINANCING ASSUMPTIONS
		Year	2019	2020	2021	2022	2023	2024
Debt & Interest Table ($000s)
1	Outstanding Debt		20,000	20,000	20,000	35,000	40,000	40,000
2	Interest on Term Loan	6.80%		(1,360.00)	(1,360.00)	(1,360.00)	(2,380.00)	(2,720.00)
INITIAL FINANCIAL STATEMENTS				>>	<<
		Year	2019						Year	2019
INCOME STATEMENT ($000s)					BALANCE SHEET ($000s)								Year	2019
1	Sales		100,000		Assets						Working Capital ($000s)
2	Cost of Goods Sold				1	Cash & Cash Equivalents				15,000	Assets
3	Raw Materials		(21,333)		2	Accounts Receivable				20,000	1	Accounts Receivable		20,000
4	Direct Labor Costs		(24,000)		3	Inventories				8,219	2	Raw Materials		2,630
5	Gross Profit		54,667.00		4	Total Current Assets				43,219	3	Finished Goods		5,589
6	Sales & Marketing		(15,000)		5	Property, Plant and Equipment				60,000	2	Inventories		8,219
7	Administration		(18,000)		6	Goodwill				-	3	Minimum Cash Balance		8,219
8	EBITDA		21,667		7	Total Assets				103,219	4	Total Current Assets		36,438
9	Depreciation		(6,667)		Liabilities & Stockholders' Equity						Liabilities
10	EBIT		15,000		8	Accounts Payable				6,205	5	Wages Payable		1,726
11	Interest Expense (net)		(1,021)		9	Debt				20,000	6	Other Accounts Payable		4,479
12	Pretax Income		13,979		10	Total Liabilities				26,205	5	Accounts Payable		6,205
13	Income Tax		(4,892.77)		11	Stockholders' Equity				77,014	Net Working Capital			30,233
14	Net Income		9,087		12	Total Liabilities & Equity				103,219	6	Increase in Net Working Capital
QUESTION 1 SOLUTION: PRO FORMA INCOME STATEMENT
		Year	2019	2020	2021	2022	2023	2024
INCOME STATEMENT ($000s)
1	Sales
2	Cost of Goods Sold
	Raw Materials
	Direct Labor Costs
3	Gross Profit
4	Sales & Marketing
5	Administration
6	EBITDA
7	Depreciation
8	EBIT
9	Interest Expense (net)
10	Pretax Income
11	Income Tax
12	Net Income

Peter DeMarzo: historical

pdemarzo: Interest on existing debt less interest earned from invested excess cash

Peter DeMarzo: historical

Q2

WORKING CAPITAL ANALYSIS
					Year	2019	>2019
Working Capital Days
Assets		Based On:				Days	Days
1	Accounts Receivable	Sales Revenue
2	Raw Materials	Raw Materials Costs
3	Finished Goods	Raw Materials + Labor Costs
4	Minimum Cash Balance	Sales Revenue
Liabilities
5	Wages Payable	Direct Labor + Admin Costs
6	Other Accounts Payable	Raw Materials + Sales & Marketing
		Year	2019	2020	2021	2022	2023	2024
Working Capital ($000s)
Assets
1	Accounts Receivable
2	Raw Materials
3	Finished Goods
2	Inventories
3	Minimum Cash Balance
4	Total Current Assets
Liabilities
5	Wages Payable								- 0
6	Other Accounts Payable
5	Accounts Payable
Net Working Capital
6	Increase in Net Working Capital

Q3

FREE CASH FLOW
		Year	2019	2020	2021	2022	2023	2024
Free Cash Flow ($000s)
1	Net Income
2	Plus: After-Tax Interest Expense
3	Unlevered Net Income
4	Plus: Depreciation
5	Less: Increases in NWC
6	Less: Capital Expenditures
7	Free Cash Flow of Firm
8	Plus: Net Borrowing
9	Less: After-Tax Interest Expense
10	Free Cash Flow to Equity
		Year	2019	2020	2021	2022	2023	2024
Free Cash Flow ($000s)
	EBIT
	Taxes
	Unlevered Net Income
	Plus: Depreciation
	Less: Increases in NWC
	Less: Capital Expenditures
	Free Cash Flow of Firm
	Plus: Net Borrowing
	Less: After-Tax Interest Expense
	Free Cash Flow to Equity

Q4

PRO FORMA FINANCIALS: BALANCE SHEET
		Year	2019	2020	2021	2022	2023	2024
BALANCE SHEET ($000s)
Assets
1	Cash & Cash Equivalents
2	Accounts Receivable
3	Inventories
4	Total Current Assets
5	Property, Plant and Equipment
6	Goodwill
7	Total Assets
Liabilities
8	Accounts Payable
9	Debt
10	Total Liabilities
Stockholders' Equity
11	Starting Stockholders' Equity
12	Net Income
13	Dividends
14	Capital Contributions
15	Stockholders' Equity
16	Total Liabilities & Equity

Peter DeMarzo: Adjusts for any initial change in cash and/or debt

Q5

COST OF CAPITAL
	Unlevered cost of capital
	Cost of Debt
CONTINUATION VALUE
Continuation Value: Multiples Approach ($000s)
1	E+BITDA in 0			Common Multiples
2	EBITDA multiple			EV/Sales
3	Cont. Enterprise Value			P/E (levered)
4	Debt			P/E (unlevered)
5	Cont. Equity Value
Continuation Value Estimate ($ millions)
	E+BITDA in 0	-		WACC Method
	EBITDA multiple	.0x		Continuing D/(E+D)			0.0%
	Cont. Enterprise Value	-		Continuing WACC			0.00%
	Debt	-		Unlevered Net Income			-
	Cont. Equity Value	-		Working Capital			-
	Value/Sales	.0x		Property, Plant, Equipment			-
	P/E (levered)	.0x
	P/E (unlevered)	.0x		Implied Growth Rate			0.00%
Continuation Value: DCF and EBITDA Multiple ($000s)
1	Long-term growth rate
2	Target D/(E+D)
3	Projected WACC
Free Cash Flow in 2011
4	Unlevered Net Income			Cont. Enterprise Value
5	Less: Inc. in NWC
6	Less: Inc. in Fixed Assets			Implied EBITDA Multiple
7	Free Cash Flow
VALUATION
		Year	0	1	2	3	4	5
APV Method ($ millions)
1	Free Cash Flow
2	Unlevered Value Vu
3	Interest Tax Shield
4	Tax Shield Value Ts
5	APV: VL = Vu + Ts
6	Debt
7	Excess Cash
8	Equity Value