BD3 SM19 GE 1

Topics: Investment, Cash flow, Inventory Pages: 8 (1197 words) Published: April 21, 2015
Chapter 19
Valuation and Financial Modeling:
A Case Study
19-1.You would like to compare Ideko’s profitability to its competitors’ profitability using the EBITDA/sales multiple. Given Ideko’s current sales of $75 million, use the information in Table 19.2 to compute a range of EBITDA for Ideko assuming it is run as profitably as its competitors. Ideko’s 2005 sales are $75 million.

Find the highest and lowest EBITDA values across all three firms and the industry as a whole:
EBITDA/Sales (%)EBITDA ($ mil)
Oakley17.012.75
Luxcottica18.513.875
Nike15.911.925
Industry12.19.075
This implies an EBITDA range of $9.075 to $13.875 million.
19-2.Assume that Ideko’s market share will increase by 0.5% per year rather than the 1% used in the chapter. What production capacity will Ideko require each year? When will an expansion become necessary (when production volume will exceed the current level by 50%)? First compute the projected annual market share:

Using these projections, calculate the projected annual production volume:

Based on these estimates, it will be 2010 before current capacity is exceeded and an expansion becomes necessary. 19-3.Under the assumption that Ideko market share will increase by 0.5% per year, you determine that the plant will require an expansion in 2010. The cost of this expansion will be $15 million. Assuming the financing of the expansion will be delayed accordingly, calculate the projected interest payments and the amount of the projected interest tax shields (assuming that the interest rates on the term loans remain the same as in the chapter) through 2010.

19-4.Under the assumption that Ideko’s market share will increase by 0.5% per year (and the investment and financing will be adjusted as described in Problem 3), you project the following depreciation:

Using this information, project net income through 2010 (that is, reproduce Table 19.7 under the new assumptions).

19-5.Under the assumptions that Ideko’s market share will increase by 0.5% per year (implying that the investment, financing, and depreciation will be adjusted as described in Problems 3 and 4) and that the forecasts in Table 19.8 remain the same, calculate Ideko’s working capital requirements though 2010 (that is, reproduce Table 19.9 under the new assumptions).

19-6.Under the assumptions that Ideko’s market share will increase by 0.5% per year (implying that the investment, financing, and depreciation will be adjusted as described in Problems 3 and 4) but that the projected improvements in net working capital do not transpire (so the numbers in Table 19.8 remain at their 2005 levels through 2010), calculate Ideko’s working capital requirements though 2010 (that is, reproduce Table 19.9 under these assumptions).

19-7.Forecast Ideko’s free cash flow (reproduce Table 19.10), assuming Ideko’s market share will increase by 0.5% per year; investment, financing, and depreciation will be adjusted accordingly; and the projected improvements in working capital occur (that is, under the assumptions in Problem 5).

19-8.Forecast Ideko’s free cash flow (reproduce Table 19.10), assuming Ideko’s market share will increase by 0.5% per year; investment, financing, and depreciation will be adjusted accordingly; and the projected improvements in working capital do not occur (that is, under the assumptions in Problem 6).

19-9.Reproduce Ideko’s balance sheet and statement of cash flows, assuming Ideko’s market share will increase by 0.5% per year; investment, financing, and depreciation will be adjusted accordingly; and the projected improvements in working capital occur (that is, under the assumptions in Problem 5).

19-10.Reproduce Ideko’s balance sheet and statement of cash flows, assuming Ideko’s market share will increase by 0.5% per year; investment, financing, and depreciation will be adjusted accordingly; and the projected improvements in working capital do not occur (that is, under the...
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