Unformatted text preview: combined federal, state, and local tax rate is 40%; capital spending will equal the firm’s rate of depreciation; and the annual change in working capital is expected to be minimal. The firm’s beta is estimated to be 2.0, the 10-year Treasury bond is 5%, and the historical risk premium of stocks over the risk-free rate is 5.5%. Rand Technology, a direct competitor of Siebel’s, recently was sold at a purchase price of 11 times 2008 after tax EBIT of 20 million, which included a 20% premium. Siebel’s equity owners would like to determine what it might be worth if they were to attempt to sell the firm in the near future. They have chosen to value the firm using the discounted cash flow and comparable recent transactions methods. They believe that either method would provide an equally valid estimate of the firm’s value.
a. What is the value of Siebel using the DCF method?
b. What is the value using the comparable recent transactions method?
c. What would be the value of the firm if we combine the results of both methods?
11 Asset-Based Methods: Tangible Book Value method
• Tangible book value (TBV) = (total assets - total liabilities - goodwill)
• Target’s estimated value = Target’s TBV x [(industry average or comparable firm market value) / (industry or comparable firm TBV)].
• Often used for valuing Financial services firms where tangible book value is primarily cash or liquid assets 12 Asset-Based Methods: Liquidation Method
• Value assets as if it is sold in an “orderly” fashion (e.g., over 9-12 months) and deduct value of liabilities and expenses associated with asset disposition.
• While varies with industry, • Receivables are often sold for 80-90% of book value
• On average, inventories might realize 80-90% of book book value depending on degree of obsolescence and condition
• Equipment values vary widely depending on age and condition and purpose (e.g., special p...
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