Suggested questions for the Commercial Fixtures Inc. case are given below.
1. What would you as an outside third party bid under the same conditions (with the same information) for the entire company (both halves)? Why?
2. What do you expect Albert Evans to bid for Gordon’s half interest? Why?
3. What should Gordon Whitlock bid for Albert’s half interest? Why?
4. How would you structure the purchase of the business?
Question #1 is a business valuation question. There are a number of ways to estimate the value of a business. You have probably covered one or more of these ways in a previous class. The next two pages review a few of the various ways to go about it.
For a discounted CF approach of valuing Commercial Fixtures Inc., I will use the following template:
VALUATION APPROACHES – OVERVIEW/REVIEW
1. Comparable Trades Analysis
— Using valuation ratios, or “multiples” of comparable firms
Use one or more valuation ratios, which include (a) Price-Earnings (b) Market-Book (c) Price-CF (d) Price-Revenues (e) Enterprise Value to EBITDA, and (f) Other ratios. The prospective value (price) of the subject firm is quantified into—and compared with—one or more of the valuation ratios of its peers. The better the performance of the subject firm relative to comparable firms in the relevant performance measures (as measured by operating ratios), the higher the appropriate valuation ratio for the firm (and vice-versa).
2. Liquidation Value, aka Book Value approach
Place liquidation values on the net working capital and fixed assets of the firm. Include tax write-off benefits, if any. This approach is rarely useful, and will typically serve as a minimum value (unless the firm is in severe distress).
3. (i.) Discounted Present Value of the Firm’s Free Cash Flows
— commonly referred to as DCF Valuation, or WACC valuation
Value of the Firm =...