It has been assumed that sales would be growing for 5% in every year. Moreover, Earning before Interest and Taxes would be 19.42% of sales. Interest expense would be incurring for 3.91% of sales. The taxes are calculated to be 3.49% of sales of respective years. Also, the non-cash additional charges would be calculated at 1.66% of sales. The working capital would be increasing for $10 in respect of previous year. Lastly, the capital expenditures would be 2.93% of sales.

The forecasting shows that the sales would be growing to $23,696 in 1993. In addition, EBIT wouldalso be increasing over the years. Along with the increase in Interest Expense and taxes, the amount of profit after tax would also be increasing over the years. As a result, the amount available for debt would also be increasing till $2359 in 1993.

Assume the unlevered cost of equity for the Case Company is 17%.  Estimate the value of the John Case Company from the perspective of the management team.  Is it worth the $20 million asking price?

As the company is experiencing debt for the first time, therefore, to make valuation for the company, Adjusted Present Value Method is used to be more appropriate. Therefore, the free cash flows have been discounted at the unlevered cost of equity which is given at 17%. As a result, thediscounted value of free cash flows has been obtained for $17,877.3

On the other hand, the value of debt is taken for $6,000 as thecompany is taking aloan of $6 Million for 6 years at the rate of 12% (prime rate+2%). The interest amount is calculated at $720. By discounting it from the same rate of 12%, assuming it as the cost of debt, PV of debt financing has been calculated at $2960.21. As debt financing benefits the company to save its tax, the net present value is calculated at $2220.16.

In order to calculate Valuation of the company based on free cash flow, Equity value has been subtracted from debt valuation and thus, thevalueof the company is calculated at $20,097.89. By following this valuation process, the conclusion is obtained that $20 million is the worthy asking price of the company. Moreover, Johnson should make efforts in order to make aninvestment in this company.

Can management offer the venture capitalist a sufficient expected return (VC’s hurdle rate is in 20% to get their investment funds, yet maintaining for itself a controlling equity position?

Internal Rate of Return shows the point where company’s inflows are equal to their outflows. It acts as a breakeven point for the company’s cash flows. Therefore, the internal rate of the company has been calculated at 11.87%, which determines that company would reach breakeven point at 1% and there would be no cash left for the company’s operations. However, the hurdle rate of Venture capital rate is to be 20% in order to get investment funds. Consequently, it would not be affordable for the company to pay off 20% along with maintenance of equity position…………………………..

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