You are looking to purchase Company A. Your projections for the EBITDA of Company A are as Follows: EBITDA Year 1 $2.0 Year 2 $3.0 Year 3 $3.5 Year 4 $4.0 Year 5 $5.0 Your cost of capital is 20%. Your investment banker shows you the EBITDA multiples for the following comparable companies: Company x 5.0x

You are looking to purchase Company A. Your projections for the EBITDA of Company A are as Follows: EBITDA Year 1 $2.0 Year 2 $3.0 Year 3 $3.5 Year 4 $4.0 Year 5 $5.0 Your cost of capital is 20%. Your investment banker shows you the EBITDA multiples for the following comparable companies: Company x 5.0x

Entrepreneurial Finance

6th Edition

ISBN:9781337635653

Author:Leach

Publisher:Leach

Chapter11: Venture Capital Valuation Methods

Section: Chapter Questions

Problem 1dM

See similar textbooks

Similar questions

COST OF CAPITAL Coleman Technologies is considering a major expansion program that has been proposed by the companys information technology group. Before proceeding with the expansion, the company must estimate its cost of capital. Suppose you are an assistant to Jerry Lehman, the financial vice president. Your first task is to estimate Colemans cost of capital Lehman has provided you with the following data, which he believes may be relevant to your task. The firms tax rate is 25%. The current price of Colemans 12% coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity, is 1.153.72. Coleman does not use short-term, interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. The current price of the firms 10%, 100.00 par value, quarterly dividend, perpetual preferred stock is 111.10. Colemans common stock is currently selling for 50.00 per share. Its last dividend (D0) was 4.19, and dividends are expected to grow at a constant annual rate of 5% in the foreseeable future. Colemans beta is 1.2, the yield on T-bonds is 7%, and the market risk premium is estimated to be 6%. For the bond-yield-plus-risk-premium approach, the firm uses a risk premium of 4%. Colemans target capital structure is 30% debt, 10% preferred stock, and 60% common equity. To structure the task somewhat, Lehman has asked you to answer the following questions: a. 1. What sources of capital should be included when you estimate Colemans WACC? 2. Should the component costs be figured on a before-tax or an a after-tax basis? 3. Should the costs be historical (embedded) costs or new (marginal) costs? b. What is the market interest rate on Colemans debt and its component cost of debt? c. 1. What is the firms cost of preferred stock? 2. Colemans preferred stock is riskier to investors than its debt, yet the preferreds yield to investors is lower than the yield to maturity on the debt Does this suggest that you have made a mistake? (Hint: Think about taxes) d. 1. Why is there a cost associated with retained earnings? 2. What is Colemans estimated cost of common equity using the CAPM approach? e. What is the estimated cost of common equity using the DCF approach? f. What is the bond-yield-plus-risk-premium estimate for Colemans cost of common equity? g. What is your final estimate for rs? h. Explain in words why new common stock has a higher cost than retained earnings. i. 1. What are two approaches that can be used to adjust for flotation costs? 2. Coleman estimates that if it issues new common stock, the flotation cost will be 15%. Coleman incorporates the flotation costs into the DCF approach. What is the estimated cost of newly issued common stock, considering the flotation cost? j. What is Colemans overall, or weighted average, cost of capital (WACC)? Ignore flotation costs. k. What factors influence Colemans composite WACC? l. Should the company use the composite WACC as the hurdle rate for each of its projects? Explain.
Begin with the partial model in the file Ch02 P21 Build a Model.xlsx on the textbooks Web site. a. Using the financial statements shown here for Lan Chen Technologies, calculate net operating working capital, total net operating capital, net operating profit after taxes, free cash flow, and return on invested capital for 2020. The federal-plus-state tax rate is 25%. b. Assume there were 15 million shares outstanding at the end of 2019, the year-end closing stock price was 65 per share, and the after-tax cost of capital was 10%. Calculate EVA and MVA for 2020. Lan Chen Technologies: Income Statements for Year Ending December 31 (Millions of Dollars) Lan Chen Technologies: December 31 Balance Sheets (Thousands of Dollars)
Hasting Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.4 (given its target capital structure). Vandell has $10.82 million in debt that trades at par and pays an 8% interest rate. Vandell’s free cash flow (FCFJ is $2 million per year and is expected to grow at a constant rate of 5% a year. Vandell pays a 40% combined federal and state tax rate. The risk-free rate of interest is 5%, and the market risk premium is 6%. Hasting’s First step is to estimate the current intrinsic value of Vandell. What are Vandell’s cost of equity and weighted average cost of capital? What is Vandell’s intrinsic value of operations? [Hint: Use the free cash flow corporate valuation model from Chapter 8.) What is the current intrinsic value of Vandell’s stock?
Hasting Corporation is interested in acquiring Vandell Corporation. Vandell has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.4 (given its target capital structure). Vandell has $10.19 million in debt that trades at par and pays an 8% interest rate. Vandell’s current free cash flow (FCF0) is $2 million per year and is expected to grow at a constant rate of 5% a year. Vandell pays a 25% combined federal-plus-state tax rate, the same rate paid by Hastings. The risk-free rate of interest is 5%, and the market risk premium is 6%. Hasting’s first step is to estimate the current intrinsic value of Vandell. What is Vandell’s cost of equity? What is its weighted average cost of capital? What is Vandell’s intrinsic value of operations? (Hint: Use the free cash flow corporate valuation model from Chapter 7.) Based on this analysis, what is the minimum stock price that Vandell’s shareholders should accept?
1. Enter your answers into the box below. Make sure you label your answers using 1, 2,..., etc. XYZ Co has two investments X and Y. Investment X has an initial capital outlay of $500 million, and the investment is expected to generate $1200 million in nine years. Investment Y has an initial capital outlay of $200 million, and the investment is expected to generate $450 million in nine years. Assume XYZ has a cost of capital of 10%. 1. Determine the internal rate of return of Investment X and Investment Y. Should X and Y be taken? 2. Determine the net present value of Investment X and Investment Y. Should X and Y be taken? 2. Enter your answers into the box below. Make sure you label your answers using 1, 2,..., etc. XYZ Co is considering to purchase equipment that has 12 years of life and requires an initial capital outlay of $240 million. The equipment will be depreciated using straight line method to zero book value in 12 years. The salvage value of the equipment is…
Wentworth Industries is 100 percent equity financed. Its current beta is 1.0. The expected market rate of return is 13 percent and the risk-free rate is 9 percent. Round your answers to two decimal places. Calculate Wentworth’s cost of equity. % If Wentworth changes its capital structure to 20 percent debt, it estimates that its beta will increase to 1.2. The after-tax cost of debt will be 7 percent. Should Wentworth make the capital structure change? Based on the weighted cost of capital of %, the capital structure (should be/should not be) changed.
If the market value of firm A is $1.5 million and the replacement cost of capital is $450,000, find the Tobin's q.
Hello. I need help with the following question please. Wentworth Industries is 100 percent equity financed. Its current beta is 0.6. The expected market rate of return is 17 percent and the risk-free rate is 9 percent. Round your answers to two decimal places. Calculate Wentworth’s cost of equity. If Wentworth changes its capital structure to 20 percent debt, it estimates that its beta will increase to 0.8. The after-tax cost of debt will be 9 percent. Should Wentworth make the capital structure change? Based on the weighted cost of capital of %, the capital structure changed.
As the general manager of a firm, you are presented with an investment proposal from one of your divisions. Its net present value, if discounted at the cost of capital for your firm (which is 15 percent), is $ 1 00,000, and its internal rate of return is 20 percent. (a) What are the economic interpretations of the net present value and internal rate of return figures? In other words, what do they mean? (b) What, if any, additional information would you like to have before approving the project?
Hardware Co. is estimating its optimal capital structure. Hardware Co. has a capital structure that consists of 80% equity and 20% debt and a corporate tax rate of 40%. Based on the short-term treasury bill rates the risk-free rate is 6% and the market return is 11%. Hardware Co. computed its cost of equity based on the CAPM – 12%. The company will shift its capital structure to 50% debt and 50% equity funded.What would be Hardware Co.’s estimated cost of equity if it will shift its capital structure to 50% debt and 50% equity funded?