M&A_ValuationExampleRoundatable

15 55 1233 wacc wacc cost of capital 1233 9

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Unformatted text preview: WACC WACC Cost of Capital = 12.33% (.9) + 5% (.1) = 11.59% Riskfree rate = 6% Riskfree rate = 6% Market risk premium = 5.5% Market risk premium = 5.5% Stand Alone Valuation: Digital - Status Quo Stand Digital had capital expenditures of $475 million, depreciation of $ 461 million and working capital was 15% of revenues. 461 Operating income, net cap expenditure and revenues are Operating expected to grow 6% a year for the next 5 years and 5% thereafter. thereafter. After year 5, capital expenditures were expected to be 110% of After depreciation; working capital remains at 15% of revenues. depreciation; Debt ratio remains at 10%, but after-tax cost of debt drops to Debt 4%. Equity beta declines to 1 thereafter. 4%. Applicable tax rate is 36%. Stand Alone Valuation: Digital - Status Quo Stand Cost of equity = 6% + 1(5.5%) = 11.5% Cost of capital = 11.5%(.9) + 4% (.1) = 10.75% Stand Alone Valuation: Digital - Status Quo Stand Free cash flow to the firm calculations FCFF1 = EBIT(1-TC)(1+g) – Net Cap Exp.(1+g) – Revenue(g)(WC/Rev) FCFF = 391.38(1-0.36)(1.06) –(475-461)(1.06) –13,046(0.06)(0.15) = $133.26m 391.38(1-0.36)(1.06) FCFF2 = EBIT(1-TC)(1+g)2 – Net Cap Exp.(1+g)2 – Revenue(1+g)(g)(WC/Rev) FCFF = 391.38(1-0.36)(1.06)2 –(475-461)(1.06)2 –13,046(1+.06)(0.06)(0.15) = 391.38(1-0.36)(1.06) $141.25m $141.25m Terminal year (FCFF6) = EBIT(1-TC)(1+g)5(1.05) – Depreciation(1+g)5(1.05)(0.10) – Terminal (1.05)(0.10) Revenue(1+g)5(0.05)(WC/Rev) Revenue(1+g) = 391.38(1-0.36)(1.06)5(1.05) – 461(1.06)5(1.05)(0.10) – 391.38(1-0.36)(1.06) (1.05)(0.10) 13,046(1.06)5(0.05)(0.15) = $156.25m 13,046(1.06) Stand Alone Valuation: Digital - Status Quo Stand 14(1.06) ==14.84 14(1.06) 14.84 13,046(0.06)(0.15) ==117.41 13,046(0.06)(0.15) 117.41 391.38(1.06)(1-0.36)=265.51 391.38(1.06)(1-0.36)=265.51 149.73/1.11593 3 149.73/1.1159 156.25/(0.1075-0.05) 156.25/(0.1075-0.05) FCFF6 FCFF6 Firm Value = $2,110.41 million (168.24+2717.35)/1.11595 5 (168.24+2717.35)/1.1159 Value...
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