To: Dr. Lynna Martinez
Subject: Calaveras Vineyards Valuation
As per your request, my associates and I have calculated a valuation for Calaveras Vineyards using the present value of cash flows. We used the valuation of future cash flows method in order to value to value the company. We have come to the conclusion, based on a number of future projections, that the best valuation of the vineyards is $4,356,000 in assets and $1,104,000 in equity. The process at determining this valuation was as follows:
First, using the projected EBIT forecasted income statement; we took out the 37% tax, change in working capital, and CAPEX for 1994-1998 and added back the depreciation and amortization expenses to arrive at free cash flows. We assumed that 1996-1998 would need an extra 100k in CAPEX in order to project the reinvestment necessities for the company. 2.
In order to discount those free cash flows, we had to find the discount rate of the company using a weighted average unlevered Beta, and the risk free rate vs. the market risk premium: a.
Beta: This was determined by using the three comparable companies and their unlevered betas as a percentage of what product lines they relate to. b.
The risk free rate was taken from the standard 30 year T-bonds rate of 5.85%. c.
The risk premium used was the expected return of small companies less the return of long term government bonds, which was 7.4% historically from 1926 to 1992. All of these values were used to calculate a discount rate of 14.5% for Calaveras which was used to discount the cash flows. The total discounted cash flows equal $1,585,000 for 1994-1998. 3.
Next, the tax shield for Calaveras was calculated by using the interest payments for each year and multiplying each value by the company’s tax rate of 37%. It was assumed that we used the 9.5% interest rate, per your suggestion, instead of the average interest expense provided in the projected income statement. These future values were then discounted...
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