Assume that you represent the chefowner of the restaurant and that you were

Assume that you represent the chefowner of the

This preview shows page 189 - 194 out of 202 pages.

Assume that you represent the chef/owner of the restaurant and that you were asking for a reasonable price for the restaurant. What would you ask for? q $ 454,000 q $ 1.484 million q Some number in the middle If it is some number in the middle , what will determine what you will ultimately get for your business? How would you alter the analysis, if your best potential bidder is a private equity or VC fund rather than a publicly traded firm?
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Aswath Damodaran 190 III. Private company for initial public offering In an initial public offering, the private business is opened up to investors who clearly are diversified (or at least have the option to be diversified). There are control implications as well. When a private firm goes public, it opens itself up to monitoring by investors, analysts and market. The reporting and information disclosure requirements shift to reflect a publicly traded firm.
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Aswath Damodaran 191 Current Cashflow to Firm EBIT(1-t) : 2,933 - Nt CpX 2,633 - Chg WC 500 = FCFF <200> Reinvestment Rate = 106.82% Expected Growth in EBIT (1-t) 1.1217*.2367 = .2528 25.28% Stable Growth g = 5%; Beta = 1.20; D/(D+E) = 6.62%;ROC=17.2% Reinvestment Rate=29.07% Terminal Value 10 = 6743/(.1038-.05) = 125,391 Cost of Equity 11.16% Cost of Debt (6+0.80%)(1-.35) = 4.42% Weights E = 93.38% D = 6.62% Discount at Cost of Capital (WACC) = 11.16% (0.9338) + 4.42% (0.0662) = 10.71% Firm Value: 73,909 + Cash: 500 - Debt: 4,583 =Equity 69,826 Riskfree Rate : Government Bond Rate = 6% + Beta 1.29 X Risk Premium 4% Unlevered Beta for Sectors: 1.24 Firm ʼ s D/E Ratio: 7.09% Historical US Premium 4% Country Risk Premium 0% InfoSoft: A Valuation Reinvestment Rate 106.82% Return on Capital 23.67% EBIT(1- t) - Reinv FCFF 3675 3926 -251 4604 4918 -314 5768 6161 -393 7227 7720 -493 9054 9671 -617 9507 2764 6743
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Aswath Damodaran 192 The twists in an initial public offering Valuation issues: Use of the proceeds from the offering : The proceeds from the offering can be held as cash by the firm to cover future investment needs, paid to existing equity investors who want to cash out or used to pay down debt. Warrants/ Special deals with prior equity investors : If venture capitalists and other equity investors from earlier iterations of fund raising have rights to buy or sell their equity at pre-specified prices, it can affect the value per share offered to the public. Pricing issues: Institutional set-up : Most IPOs are backed by investment banking guarantees on the price, which can affect how they are priced. Follow-up offerings : The proportion of equity being offered at initial offering and subsequent offering plans can affect pricing.
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Aswath Damodaran 193 A. Use of the Proceeds The proceeds from an initial public offering can be Taken out of the firm by the existing owners Used to pay down debt and other obligations Held as cash by the company to cover future reinvestment needs How you deal with the issuance will depend upon how the proceeds are used.
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  • Spring '11
  • tnaga
  • P/E ratio, PEG ratio, Aswath Damodaran, Damodaran

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