Finch Co Case Solution
The case states that FinchCo also operated one of its subsidiaries in the retail sector known as Finch Properties. Furthermore, this investment was shown in the books of FinchCo as investment in Finch properties and the income statements, cash flow statements and the balance sheets of the parent company and its subsidiary were not consolidated. Therefore, now in order to calculate the total enterprise value of FinchCo, the value of Finch properties also needs to be determined and added in the present value of the free cash flows of FinchCo.
Real estate was owned by the Finch Properties and it had been appraised at a value of $ 15800 recently. Therefore, this value has been added in the present value of the free cash flows of FinchCo in order to calculate the total enterprise value. The total enterprise value of FinchCo has been calculated to be around $ 32232.
Question 4 – Value of Equity of FinchCo
The value of equity has been then calculated in the excel spreadsheet. In the previous calculation the total present value of the free cash flows of FinchCo has been calculated. The present value of the free cash flows is $ 16432. Moreover, in the next step the total debt at the end of the year 2010 for the FinchCo Company has been deducted from the present value of the free cash flows of FinchCo. In the third step, the value of equity of the Finch Properties that is provided in the case which is around $15,800 has been added in the value of the company. Therefore, in this way the total value of FinchCo as a whole is $ 11200.
Question 5 – FinchCo Worth & Recommendation
The valuation of FinchCo has been performed in the previous questions based upon the discounted cash flow valuation method. However, in this question, the valuation of the company has also been performed upon the basis of the multiple trading comparable method. The only comparable company data that has been provided in the case is the Toromont Industries. Therefore, the valuation for the FinchCo has been derived on the basis of the price to earnings ratio of Toromont Industries.
The price to earnings ratio for Toromont Industries is 14.94 times. This multiple has been then multiplied with the net income of FinchCo for the year 2009 as the net income for 2010 is negative. The net income of FinchCo in 2009 is $ 1426. Therefore, based upon this the worth of the company has been calculated by multiplying it with the price to earnings ratio of Toromont Industries. The worth of the company has been calculated to be $ 21305. The value of the company based upon the discounted cash flow method is $ 32232.
If we take the average of these two values, then the worth of the company would be $ 26769. This seems to be a good enterprise value for FinchCo. Based upon this value, it is recommended for the chief executive officer of a small private equity company, Amanpreet Bhathal, to buy FinchCo for the average enterprise value as calculated above. Also, as the economy is going to take a positive turn and the sales would continue to grow at a constant rate of 3%, therefore, if the owners of the private equity firm buy FinchCo, then ultimately the wealth of the shareholders would be increased………………..
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