If we want to do the stand-alone-valuation for Framedia at the end of 2005, we should calculate the free cash flow to firm after 2005 and the residual value of Framedia and then discount all the cash flows to the end of 2005. Because it’s stand-alone-valuation we should do, we need to value the whole firm and then compare the stand-alone-value with the synergistic value after the merger. So it’s the firm value we should compare with. We can get the effective tax rate by dividing the profit before taxation by tax payment and the tax rate is 30%. According to the formula:
FCFF= Net Income + Depreciation + Interest Expense – Change in net working capital – CapEx We can get the free cash flows to firm every year after 2005:
Change in working capital
Since the exit Free Cash Flow multiple is 13, the residual value of Framedia at the end of 2008 will be 13*18.7=243.1. The stand-alone-value of Framedia according to the DCF model is (discount rate is 30%): Value = 5.7/(1+30%) + 10.7/(1+30%)2 + 18.7/(1+30%)3 + 243.1/(1+30%)3 = 129.88million
At the time of the case, Framedia faced two alternative choices. Firstly, Framedia can go public independently. After the successful IPO of Focus Media, Merrill Lynch and JP Morgan have approached Framedia and showed interest in underwriting the company’s IPO. Because of the successful IPO of Focus Media, as a company in same industry and from same country, Framedia has been in a good position in the view of investors. Through IPO, Framedia can get the cash they need to expand their business and provide exist for PE investors. If the bullish view for the company sustains, Framedia can be valued at a much higher price in equity market than in the acquisition by Focus Media. But the mood in stock market can change substantially in a very short period, which means that...
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