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Corporate Finance, 3e (Berk/DeMarzo)
Chapter 19 Valuation and Financial Modeling: A Case Study
19.1 Valuation Using Comparables
Use the tables for the question(s) below.
Estimated 2005 Income Statement and Balance Sheet Data for Ideko Corporation
Year 2005 Year 2005
Income Statement ($ 000) Balance Sheet ($ 000)
1 Sales 75,000 Assets
2 Cost of Goods Sold 1 Cash and Equivalents 12,664
3 Raw Materials (16,000) 2 Accounts Receivable 18,493
4 Direct Labor Costs (18,000) 3 Inventories 6,165
5 Gross Profit 1,000 4 Total Current Assets 37,322
6 Sales and Marketing (11,250) 5 Property, Plant, and Equipment 49,500
7 Administrative (13,500) 6 Goodwill —
8 EBITDA 16,250 7 Total Assets 86,822
9 Depreciation (5,500) Liabilities and Stockholder’s Equity
10 EBIT 10,750 8 Accounts Payable 4,654
11 Interest Expense (net) (75) 9 Debt 4,500
12 Pre-tax Income 10,675 10 Total Liabilities 9,154
13 Income Tax (3,736) 11 Stockholder’s Equity 77,668
14 Net Income 6,939 12 Total Liabilities and Equity 86,822
The following are financial ratios for three comparable companies:
Ratio Oakley, Inc. Luxottica Group Nike, Inc.
P/E 24.8x 28x 18.2x
EV/Sales 2x 2.7x 1.5x
EV/EBITDA 11.6x 14.4x 9.3x
EBITDA/Sales 17.0% 18.5% 15.9
1) Based upon the average P/E ratio of the comparable firms, Ideko’s target market value of
equity is closest to:
A) $157 million
B) $155 million
C) $193 million
D) $165 million
2) Based upon the average EV/Sales ratio of the comparable firms, Ideko’s target economic value
is closest to:
A) $191 million
B) $155 million
C) $165 million
D) $157 million
3) Based upon the average EV/Sales ratio of the comparable firms, if Ideko holds $6.5 million of
cash in excess of its working capital needs, then Ideko’s target market value of equity is closest
to:
A) $165 million
B) $157 million
C) $193 million
D) $191 million
4) Based upon the average EV/EBITDA ratio of the comparable firms, Ideko’s target economic
value is closest to:
A) $191 million
B) $155 million
C) $157 million
D) $193 million
5) Based upon the average EV/EBITDA ratio of the comparable firms, if Ideko holds $6.5
million of cash in excess of its working capital needs, then Ideko’s target market value of equity
is closest to:
A) $155 million
B) $157 million
C) $165 million
D) $193 million
6) What range for the market value of equity for Ideko is implied by the range of P/E multiples
for the comparable firms?
7) What range for the market value of equity for Ideko is implied by the range of EV/Sales
multiples for the comparable firms if Ideko holds $6.5 million of cash in excess of its working
capital needs?
8) What range for the market value of equity for Ideko is implied by the range of EV/EBITDA
multiples for the comparable firms if Ideko holds $6.5 million of cash in excess of its working
capital needs?
19.2 The Business Plan
Use the following information to answer the question(s) below:
Ideko’s Planned Debt
Year 2005 2006 2007 2008 2009 2010
Outstanding Debt 100,000 100,000 100,000 115,000 120,000 120,000
1) If Ideko’s loans will have an interest rate of 6.8%, then the interest expense paid in 2008 is
closest to:
A) $6,800
B) $7,310
C) $7,820
D) $7,990
2) If Ideko’s loans will have an interest rate of 6.8%, then the interest expense paid in 2009 is
closest to:
A) $6,800
B) $7,310
C) $7,820
D) $7,990
Use the table for the question(s) below.
Ideko Sales and Operating Cost Assumptions
Year 2005 2006 2007 2008 2009 2010
Sales Data Growth/Year
1 Market Size (000 units) 5.0% 10,000 10,500 11,025 11,576 12,155 12,763
2 Market Share 1.0% 10.0% 11.0% 12.0% 13.0% 14.0% 15.0%
3 Average Sales Price ($/unit) 2.0% 75.00 76.50 78.03 79.59 81.18
82.81
Cost of Goods Data
4 Raw Materials ($/unit) 1.0% 16.00 16.16 16.32 16.48 16.65 16.82
5 Direct Labor Costs ($/unit) 4.0% 18.00 18.72 19.47 20.25 21.06
21.90
Operating Expense
and Tax Data
6 Sales and Marketing
(% sales) 15.0% 16.5% 18.0% 19.5% 20.0% 20.0%
7 Administrative (% 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%
3) Based upon Ideko’s Sales and Operating Cost Assumptions, what production capacity will
Ideko require in 2007?
A) 1,505 units
B) 1,323 units
C) 1,914 units
D) 1,115 units
4) Based upon Ideko’s Sales and Operating Cost Assumptions, what production capacity will
Ideko require in 2008?
A) 1,702 units
B) 1,323 units
C) 1,505 units
D) 1,914 units
5) Based upon Ideko’s Sales and Operating Cost Assumptions, what production capacity will
Ideko require in 2009?
A) 1,505 units
B) 1,115 units
C) 1,323 units
D) 1,702 units
Use the tables for the question(s) below.
Estimated 2005 Income Statement and Balance Sheet Data for Ideko Corporation
Year 2005 Year 2005
Income Statement ($ 000) Balance Sheet ($ 000)
1 Sales 75,000 Assets
2 Cost of Goods Sold 1 Cash and Equivalents 12,664
3 Raw Materials (16,000) 2 Accounts Receivable 18,493
4 Direct Labor Costs (18,000) 3 Inventories 6,165
5 Gross Profit 1,000 4 Total Current Assets 37,322
6 Sales and Marketing (11,250) 5 Property, Plant, and Equipment 49,500
7 Administrative (13,500) 6 Goodwill —
8 EBITDA 16,250 7 Total Assets 86,822
9 Depreciation (5,500) Liabilities and Stockholder’s Equity
10 EBIT 10,750 8 Accounts Payable 4,654
11 Interest Expense (net) (75) 9 Debt 4,500
12 Pre-tax Income 10,675 10 Total Liabilities 9,154
13 Income Tax (3,736) 11 Stockholder’s Equity 77,668
14 Net Income 6,939 12 Total Liabilities and Equity 86,822
6) Ideko’s Accounts Receivable Days is closest to:
A) 84 days
B) 95 days
C) 90 days
D) 75 days
19.3 Building the Financial Model
Use the following information to answer the question(s) below:
1) The after tax interest expense in 2008 is closest to:
A) 2,380
B) 4,420
C) 6,800
D) 7,820
2) The free cash flow to the firm in 2008 is closest to:
A) -5,005
B) -1,755
C) 5,575
D) 14,995
3) The free cash flow to equity in 2008 is closest to:
A) -5,005
B) -1,755
C) 5,575
D) 9,995
4) The after tax interest expense in 2010 is closest to:
A) 0
B) 2,856
C) 5,304
D) 8,160
5) The free cash flow to the firm in 2010 is closest to:
A) 10,684
B) 11,559
C) 23,698
D) 26,394
6) The free cash flow to equity in 2010 is closest to:
A) 6,255
B) 10,684
C) 11,559
D) 18,394
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Use the table for the question(s) below.
Pro Forma Income Statement for Ideko, 2005-2010
Year 2005 2006 2007 2008 2009 2010
Income Statement ($ 000)
1 Sales 75,000 88,358 103,234 119,777 138,149 158,526
2 Cost of Goods Sold
3 Raw Materials (16,000) (18,665) (21,593) (24,808) (28,333) (32,193)
4 Direct Labor Costs (18,000) (21,622) (25,757) (30,471) (35,834) (41,925)
5 Gross Profit 41,000 48,071 55,883 64,498 73,982 84,407
6 Sales and Marketing (11,250) (14,579) (18,582) (23,356) (27,630) (31,705)
7 Administrative (13,500) (13,254) (15,485) (16,769) (17,959) (20,608)
8 EBITDA 16,250 20,238 21,816 24,373 28,393 32,094
9 Depreciation (5,500) (5,450) (5,405) (6,865) (7,678) (7,710)
10 EBIT 10,750 14,788 16,411 17,508 20,715 24,383
11 Interest Expense (net) (75) (6,800) (6,800) (6,800) (7,820) (8,160)
12 Pre-tax Income 10,675 7,988 9,611 10,708 12,895 16,223
13 Income Tax (3,736) (2,796) (3,364) (3,748) (4,513) (5,678)
14 Net Income 6,939 5,193 6,247 6,960 8,382 10,545
7) With the proper changes it is believed that Ideko’s credit policies will allow for an account
receivables days of 60. The forecasted accounts receivable for Ideko in 2006 is closest to:
A) $19,690
B) $16,970
C) 22,710
D) $14,525
8) With the proper changes it is believed that Ideko’s credit policies will allow for an account
receivables days of 60. The forecasted accounts receivable for Ideko in 2007 is closest to:
A) $14,525
B) $16,970
C) 22,710
D) $19,690
9) With the proper changes it is believed that Ideko’s credit policies will allow for an account
receivables days of 60. The forecasted accounts receivable for Ideko in 2008 is closest to:
A) $14,525
B) $19,690
C) 22,710
D) $16,970
10) The amount of net working capital for Ideko in 2006 is closest to:
A) $22,750
B) $35,195
C) $30,510
D) $26,420