Fi512 Dcf Valuation Assignment

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1. [DCF Valuation and Ownership Concepts] The venture investors and founders of ACE Products, a closely held corporation, are contemplating merging the successful venture into a much larger diversified firm that operates in the same industry. ACE estimates its free cash flows that will be available to the enterprise next year at $5,200,000. Since the venture is now in its maturity stage, ACE’s free cash flows are expected to continue to grow at a 6 percent annual compound growth rate in the future. A weighted average cost of capital (WACC) for the venture is estimated at 15 percent. Interest-bearing debt owed by ACE is $17.5 million. In addition, the venture has surplus cash of $4 million. ACE currently has five million shares outstanding, with three million held by venture investors and two million held by founders. The venture investors have an average investment of $2.50 per share while the founders’ average investment is $.50 per share.

A. Based on the above information, estimate the enterprise value of ACE Products. What would be the value of the venture’s equity?

According to Chapter 9 of the text: the current value of a growing perpetuity is the next period’s cash flow (VCFT) divided by the spread between the assumed constant discount (r∞) and growth (g) rates:

Enterprise operating value would equal:
Enterprise next year at $5,200,000/ (WACC for the venture is estimated at 15 percent - expected to continue to grow at a 6 percent) 5,200,000 / (.15 - .06) = 57,777,777.78 or $57,777,778

Total entreprise value = $57,777,778 enterprise operating value + $4,000,0000 surplus cash = $61,777,778

Equity Value = $61,777,778 Total enterprise value - $17,500,000 interest bearing debt owed = $44,277,778

B. How much of the value of ACE would belong to the venture investors versus the founders? How much would the venture be worth on a per-share basis?

ACE currently has five million shares outstanding, with three million held by venture investors and two million held by founders. The venture investors have an average investment of $2.50 per share while the founders’ average investment is $.50 per share.

Owner’s percentage = 3M shares held by venture investor / 5M shares outstanding
3,000,000 / 5,000,000 = 0.60 or 60%
Founder’s percentage = 2M shares held by founders / 5M shares outstanding
2,000,000 / 5,000,000 = 0.40 or 40%

Venture worth per-share basis:
Venture investors: $44,277,778 equity value x .60 = $26,566,667 venture investors value
$26,566,667 / 3,000,000 shares held = $8.856 or $8.86 per share

Founders:$44,277,778 equity value x .40 = $17,711,111 founders value
$17,711,111 / 2,000,000 shares held = $8.856 or $8.86 per share

Both the venture investors and founders per share cost = $8.856 or $8.86 which can also be checked by taking the total shares and divide into the equity value:
$44,277,778 / 5,000,000 shares held = $8.856 or $8.86 per share

C. What would be the percentage appreciation on the stock bought by the venture investors versus the investment appreciation for the founders?

The venture investors have an average investment of $2.50 per share while the founders’ average investment is $.50 per share.

Venture investor’s percentage appreciation:
[(price per share cost $8.856 minus average Venture investment cost per share $2.50) divided by average investment cost per share] x 100 = [($8.856 - $2.50) / $2.50] x 100
= 6.356 / 2.50) x 100
= 2.5424 x 100
= 254.24 % Venture Investors percentage appreciation

Founder’s percentage appreciation:
[(price per share cost $8.856 minus average Founder investment cost per share $.50) divided by average investment cost per share] x 100 = [($8.856 - $.50) / $.50] x 100
= 8.356 /.50) x 100
= 16,712 x 100
= 1,671.20 % Venture Investors percentage appreciation

D. If the founders have held their investments for five years, calculate the compound annual or...
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