Module 3: Valuation

Cost of Capital

1.
Boeing provides you with the following information in order to ascertain the cost of capital.
Rating: AA, Default spread: 1%, Treasury Bond Rate (Rf): 5%, Beta: 0.56, Risk Premium:
5.51%, Book Value of Equity: 12.316 billion, Book Value of Debt: 6.972 billion, Tax rate:
40%

Net Asset Value/Liquidation Value

2.
M ltd submits the following information as on 31st March ,2010
Fixed Assets Rs. 15,00,000
Current Assets Rs. 16,00,000
Patent rights Rs. 250,000
Investments Rs. 100,000
External Liabilities Rs. 400,000
Capital comprises of 25,000 equity shares of Rs. 100 each fully paid up. There is no
realizable value for patents. Ascertain the value per share.

3.
Following is the balance sheet of RK Ltd. as on 31st March,2010.
Liabilities Rs. Assets Rs.
200,000 equity shares
20,00,000 Goodwill 1,00,000
of 10 each
Reserves 30,00,000 Building 9,00,000
Long term loan 10,00,000 Machinery 40,00,000
Current liabilities 5,40,000 Vehicles 1,00,000
Shares in T ltd. (3000
3,00,000
equity shares of 100 each)
Current Assets 11,40,000
Total 134,00,000 Total 134,00,000
Calculate the Net Asset Value per share of RK ltd. using the details given below:
a. Goodwill is valued at Rs. 10,00,000. Machinery at Rs. 49,50,000, Building at Rs.
20,00,000 & Vehicles at Rs. 50,000
b. Current Assets & Current Liabilities are to be taken at Book value.
c. Shares of T Ltd. are to be valued on the basis of Net assets method

Balance Sheet of T Ltd. as on 31.3.2010

Liabilities Rs. Assets Rs.
5000 Equity shares of 500,000 Fixed Assets 900,000
Rs. 100 each
Reserves 800,000 Current Assets 11,00,000
Current Liabilities 700,000

Total 20,00,000 Total 20,00,000

Fixed assets of T ltd. revalued at Rs. 12,00,000 and current liabilities at Rs. 600,000
4.

iii) The market value of the investment as on 31st December, 2011 was Rs. 10,000.

b) Value of Goodwill: - A ltd =16840; K ltd = 11,000

You are required to prepare a statement how you would arrive at the Net Asset value per
shares to the nearest rupee of the ordinary share in (i) A Ltd. ii) K Ltd.

Dividend Discount Model

5.
Consolidated Edison is the electric utility that supplies power to residences and business in
New York city. It is a quasi-monopoly whose process and profits are regulated by the state of
New York. the entity paid dividends per share of $2.22 in 2010 when its EPS was $3.47. The
company has a risk-free rate of 3.5%, the risk premium of 5% in 2010, beta of 0.8 whereas the
growth rate is estimated to be 3.53% p.a. Ascertain the value of the company based on Dividend
Model. The stock was trading at $ 42 per share at the time of this valuation.
6.
Sonoco Products Company has recently declared quarterly dividend of $ 0.31 per share.
Forecasted growth rate for the company’s Dividend is 4%, The beta applicable for the company
is 0.95, Market Risk premium is 4.5% and Risk-Free rate is 3%. Ascertain the value of the
company based on Dividend Model.

7.
Afron Mines is a profitable company that is expected to pay a $4.25 dividend next year.
Because of its depleting mining properties, the best estimate is that dividends will decline
forever at a rate of 4% p.a. The required rate of return on Afron stock is 9%. What is the value
of Afron shares?

8.
Meditech has the following details: Current Dividend is $ 0.4, which is expected to grow at 9%
per year during next 10 years. Thereafter the growth will stabilise at 5% forever. The cost of
equity for the firm is 7%. Compute its value.

9.
Procter and Gamble (P&G) is one of the leading global consumer product companies, owning
some of the most valuable brands in the world, including Gillette razors, tide detergent, Crest
toothpaste and Vicks cough medicine. P&G has a long history of paying dividends. Due to its
business expansion plans the company is going to be provided with a platform to deliver high
growth at least for the next five years. During the high growth period, the dividends will grow
at 10% and after that it would grow at the risk free rate. The company currently has reported $
12,736 million in earnings for 2010 and paid out 49.74% of the earnings as dividends, on a per
share basis earnings were $ 3.82 and dividends were $ 1.92. The beta applicable to the company
is 0.9 which reflects the beta for large consumer product companies. The risk-free rate is 3.5%
and the market premium is 5%. Compute the value.

10.
Casey Hyunh is trying to value the stock of Resources Limited. The projections for the next
four years are based on the following assumptions.
Sales will be $ 300 million in year 1. Sales will grow at 15 percent in years 2 and 3 and at 10
percent in year 4.
Operating profits (EBIT) will be 17 percent of sales in each year.
Interest expense will be $ 10 million per year.
Income tax rate is 30 percent.
Earnings retention ratio would stay at 0.60.
The dividend growth rate will be constant from year 4 forward and this final growth rate will
be 200 basis points less than the growth rate from year 3 to year 4. The company has 10 million
shares outstanding. Hyunh has estimated the required return on Resources ’ stock to be 13
percent. Estimate the value per share as per Dividend discount model.

11
An analyst is preparing a forecast of dividends for Hoshino Distributors for the next five years.
He uses the following assumptions:
Sales are $100 million in year 1. They grow by 20 percent in year 2, 15 percent in year 3, and
10 percent in years 4 and 5. There after will stabilise at 8% p.a.
Operating profits (earnings before interest and taxes, or EBIT) are 20 percent of sales in years
1 and 2, 18 percent of sales in year 3, and 16 percent of sales in years 4 and 5.
Interest expenses are 10 percent of total debt for the current year.
The income tax rate is 40 percent.
Hoshino pays out 20 percent of earnings in dividends in years 1 and 2, 30 percent in year 3, 40
percent in year 4, and 50 percent in year 5.
Retained earnings are added to equity in the next year.
Total assets are 80 percent of the current year’s sales in all years. In year 1, debt is $40 million
and shareholders’ equity is $40 million.
Debt equals total assets minus shareholders’ equity. Shareholders’ equity will equal the
previous year’s shareholders’ equity plus the addition to retained earnings from the previous
year.
Hoshino has 4 million shares outstanding. The required return on equity is 15 percent. The
analyst wants to estimate the current value per share of Hoshino.

12.
Françoise Delacour, a portfolio manager of a U.S.-based diversified global equity portfolio, is
researching the valuation of Vinci SA (NYSE Euronext: DG). Vinci is the world’s largest
construction company, operating chiefly in France (approximately two-thirds of revenue) and
the rest of Europe (approximately one-quarter of revenue). Having decided to compute the H-
model value estimate for DG, Delacour gathers the following facts and forecasts: The share
price as of mid-August 2007 was €57. The current dividend is €1.37. The initial dividend
growth rate is 24 percent, declining linearly during a 12-year period to a final and perpetual
growth rate of 6 percent. Delacour estimates DG’s required rate of return on equity as 10
percent. Using the H-model and the information given, estimate the per-share value of DG.
Compare the value from H-model with the actual value from 2 stage model.

13.
Assorted Fund, a UK - based globally diversified equity mutual fund, is considering adding
Talisman Energy Inc. (Toronto Stock Exchange: TLM) to its portfolio. Talisman is an
independent upstream oil and gas company headquartered in Calgary, Canada. It is one of the
largest oil and gas companies in Canada and has operations in several countries. Brian Dobson,
an analyst at the mutual fund, has been assigned the task of estimating a fair value of Talisman.
Dobson is aware of several approaches that could be used for this purpose.
After carefully considering the characteristics of the company and its competitors, he believes
the company will have extraordinary growth for the next few years and normal growth
thereafter. He has therefore concluded that a two - stage DDM is the most appropriate for
valuing the stock. The total dividends during 2008 is C $ 0.175, respectively.
Dobson believes that the growth rate will be 14 percent in the next year. He has estimated that
the first stage will include the next eight years. Dobson is using the CAPM to estimate the
required return on equity for Talisman. He has estimated that the beta of Talisman is 0.84. The
Canadian risk - free rate, as measured by the annual yield on the 10 - year government bond,
is 4.1 percent. The equity risk premium for the Canadian market is estimated at 5.5 percent.
Dobson is doing the analysis in January 2008 and the stock price at that time is C $ 17. Dobson
realizes that even within the two - stage DDM, there could be some variations in the approach.
He would like to explore how these variations affect the valuation of the stock. Specifically, he
wants to estimate the value of the stock for each of the following approaches separately.
I. The dividend growth rate will be 14 percent throughout the first stage of eight years.
The dividend growth rate thereafter will be 7 percent.
II. Instead of using the estimated stable growth rate of 7 percent in the second stage,
Dobson wants to use his estimate that eight years later Talisman ’ s stock will be
 worth 17 times its earnings per share (trailing P/E of 17). He expects that the
earnings retention ratio at that time will be 0.70.
III. In contrast to the first approach in which the growth rate declines abruptly from 14
percent in the eighth year to 7 percent in the ninth, the growth rate would decline
linearly from 14 percent in the first year to 7 percent in the ninth.

 What is the terminal value of the stock based on the first approach?
 In the first approach, what proportion of the total value of the stock is represented by
the value of the second stage?
 What is the terminal value of the stock based on the second approach (earnings
multiple)?
 What is the current value of the stock based on the second approach?
 Based on the third approach (the H - model), the stock is over values or undervalued?

FCFE Model & FCFF Model

14.
Disney has provided you with the following details. Compute the FCFE & FCFF for the
company. (Tax rate – 30%)
Year EBIT Dep Capex Change in Debt Debt
W.C issued repaid
2010 3963 1713 4693 308 1190 1371
2009 3307 1631 1940 -109 1750 1617

15.
Max Ltd. wants to understand the value for 2016 through FCFF & FCFE method. It provides
you with the following details.
Statement of Profit & loss (in lakhs)
Particulars 2016 2015
Sales 300 250
COGS 120 100
Selling & Distribution Exp 35 30
Depreciation 50 40
EBIT 95 80
Interest 15 10
PBT 80 70
Tax 24 21
Profit for the year 56 49

Balance sheet
Particulars 2016 2015
Cash 10 5
Accounts Receivable 30 15
Inventory 40 30
Current Assets 80 50

Gross Property , Plant & 400 300

Equipment
 (-) Accumulated Depreciation (190) (140)
Total Assets 290 210

Accounts Payable 20 20
Short term Debt 20 10
Current liabilities 40 30
Long term Debt 114 100
Reserves 86 30
Share Capital 50 50
Total Liabilities 290 210

16.
Using the Information given below (in lakhs), calculate the FCFF value of the company for all
the years. Assume tax rate=30%
Particulars 2010 2011 2012
Cash flow from operations
EBIT 97.52 107.28 118
(+) Depreciation 45 49.35 54.45
Increase in Accounts receivable -100 -10 -11
Increase in Inventory -6 -6.6 -7.26
Increase in accounts payable 50 5 5.5

Cash Paid for Taxes -41.8 -45.98 -50.57

Cash flow from operation 44.72 99.05 109.12

Cash flow from Investing activity

Purchase of PPE 0 -50 -55

Cash flow from financing activities

Borrowing 22.4 24.64 27.1
Cash paid for Interest -15.68 -17.25 -18.97

Opening Cash Balance 0 51.44 107.88

Closing Cash Balance 51.44 107.88 170.13

17.
Volkswagen is a mature German automobile company. The firm is assumed to be in stable
growth, and the following inputs were used to value it in May 2011.The net income in 2010
was 5279 million euros. Volkswagen reported capital expenditure of 11462 million euros,
depreciation of 10089 million euros and an increase in working capital of 423 million euros in
2010. Its cost of equity is estimated using a beta of 1.20, reflecting the average beta across
Europeans auto companies, a euro risk free rate of 3.2% and an equity risk premium of 5%.
The company repaid Debt of 400 million euros. Find the value of equity using FCFE
18.
The company has EBIT of Rs. 3544 million and the tax rate applicable is 30%. The Capex
incurred by the company was Rs. 1659 million whereas the depreciation was Rs. 1914 million.
Increase in Working capital for the company during the year was Rs. 1119 million. Risk free
rate applicable is 7%, Beta 0.8 and risk premium is 8%. Cost of debt applicable to the company
is 9.5% and the value of Debt is Rs. 5519 million. Book Value of Equity is Rs. 21982 million.
Find the value of firm and Equity based on FCFF approach

19.
In 2010, Coca Cola reported net income of $11,809 million, capital expenditures of $2,215
million, depreciation of $1,443 million and an increase in working capital of $335 million.
Incorporating the fact that Coca Cola raised $150 million more in debt than it repaid and the
book value of its equity is 25,346. The Beta applicable to the company is 0.9, Risk free rate is
3.5% and premium is 5.5%. The high growth period for the company will be for 3 years at
3.78% p.a. find the value of equity based on FCFE approach.

20.
Data related to Nestle Ltd is given below:
Current net income= 5763 million
Current capital spending= 5058 million
Current Depreciation= 3330 million
Change in working capital= 368 million
Book value of equity= 25078 million
Net debt issues= 272 million
No. of shares= 38.85 million
10-year bond rate is 4%. Beta is 0.85 and market risk premium is 5.26%. The firm will be in
high growth phase for 10 years at 7.2% p.a after which there will be stable growth. If the stock
is trading at 3390 currently, comment on whether the stock is undervalued or overvalued.

21.
Do Pham is evaluating Phaneuf Accelerateur by using the FCFF and FCFE valuation
approaches. Pham has collected the following information (currency in euro): Phaneuf has net
income of € 250 million, depreciation of € 90 million, capital expenditures of € 170 million,
and an increase in working capital of € 40 million. Phaneuf will finance 40 percent of the
increase in net fixed assets (capital expenditures less depreciation) and 40 percent of the
increase in working capital with debt financing. Post debt financing, the Interest expenses are
€ 150 million.
FCFF is expected to grow at 6.0 percent indefinitely, and FCFE is expected to grow at 7.0
percent. The tax rate is 30 percent. Phaneuf is financed with 40 percent debt and 60 percent
equity. The before - tax cost of debt is 9 percent, and the before - tax cost of equity is 13 percent.
Phaneuf has 10 million outstanding shares.
A. Using the FCFF valuation approach, estimate the total value of the firm,
B. Using the FCFE valuation approach, estimate the total value of equity
22.
Vishal Noronha needs to prepare a valuation of Sindhuh Enterprises. Noronha has assembled
the following information for his analysis. It is now the first day of 2008. EPS for 2007 is $2.40.
For the next five years, the growth rate in EPS is given in the following table. In 2012 and
beyond, the growth rate will be 7 percent.
Year 2008 2009 2010 2011 2012
EPS Growth 30 18 12 9 7
%
Net investments in fixed capital (net of depreciation) for the next five years are given in the
following table. After 2012, capital expenditures are expected to grow at 7 percent annually.
Year 2008 2009 2010 2011 2012
Net capex 3 2.5 2 1.5 1
per share
The investment in working capital each year will equal 50 percent of the net investment in
capital items. Thirty percent of the net investment in fixed capital and investment in working
capital will be financed with new debt financing. Current market conditions dictate a risk-free
rate of 6.0 percent, an equity risk premium of 4.0 percent, and a beta of 1.10 for Sindhuh
Enterprises. What is the per-share value of Sindhuh Enterprises as per FCFE method?

23.
Exotica Corporation is expected to grow at a higher rate for 5 years; thereafter the growth rate
will fall and stabilize at a lower level. The following information is available.
Particulars Rs. in millions
Revenues 4000
EBIT 500
Capex 300
Depreciation 200
Corporate tax rate 40%
Paid up equity share capital (Rs. 10) 300
Market value of debt 1250
Input for the high growth rate
Length for forecast period 5 years
Growth rate in revenues, Dep, EBIT and Capex 10%
Working Capital as a % of revenue 30%
Cost of Debt (pre-tax) 15%
Debt Equity Ratio 1:1
Risk Free rate 13%
Market Risk premium 6%
Equity beta 1.333
Input for the Stable growth period
Expected Growth rate in revenues and EBIT 6%
Capital Expenditure are offset by depreciation
Working Capital as a % of revenue 30%
Cost of Debt (Pre-tax) 15%
Debt Equity Ratio 2:3
Risk Free rate 12%
Market Risk premium 7%
Equity beta 1.00
Calculate the value of the firm & equity using FCFF
Residual Valuation
24.
Axis Manufacturing Company, Inc. (AXCI), a very small company in terms of market
capitalization, has total assets of €2 million financed 50 percent with debt and 50 percent with
equity capital. The cost of debt is 7 percent before taxes; after - tax cost of debt is 4.9 percent.
The cost of equity capital is 12 percent. The company has earnings before interest and taxes
(EBIT) of € 200,000 and a tax rate of 30 percent. Compute the residual income.

25.
David Smith is evaluating the expected residual income as of the end of September 2007 of
Carrefour SA (NYSE Euronext Paris: FR0000120172), a France - based operator of
hypermarkets and other store formats in Europe, the Americas, and Asia. Beta is 0.72, a 10 -
year government bond yield of 4.3 percent, and an estimated equity risk premium of 7 percent.
Smith obtains the following data:
Current market price- € 48.83
Book value per share as of 31 December 2006- € 13.46
Consensus annual earnings estimates
FY 2007 (ending December) € 2.71
FY 2008 € 2.86
Annualized dividend per share forecast
FY 2007 € 1.03
FY 2008 € 1.06

What is the forecast residual income for fiscal years ended December 2007 and December
2008?

26.
Joseph Yoh is evaluating a purchase of Canon, Inc. (NYSE: CAJ). Current book value per
share is $ 18.81, and the current price per share is $ 51.90. Yoh expects long - term ROE to be
16 percent and long - term growth to be 8 percent. Assuming a cost of equity of 11 percent,
what is the value of Canon stock calculated using a single - stage residual income model?

27.
Bugg Properties ’ expected EPS is $ 2.00, $ 2.50, and $ 4.00 for the next three years. Analysts
expect that Bugg will pay dividends of $ 1.00, $ 1.25, and $ 12.25 for the three years. The last
dividend is anticipated to be a liquidating dividend; analysts expect Bugg will cease operations
after year 3. Bugg ’ s current book value is $ 6.00 per share, and its required rate of return on
equity is 10 percent. 1. Calculate per - share book value and residual income for the next three
years. 2. Estimate the stock’s value using the residual income model

28.
CSCO has a required rate of return of approximately 10.5 percent. CSCO’s book value per
share in the beginning of 2007 was $ 5.02. ROE is expected to be 29 percent for the year 2007.
Because of competitive pressures, Sumargo expects CSCO’s ROE to decline in the following
years and incorporates an assumed decline of 1 percent each year till 5 years. From 6th year,
the growth rate will be 8%p.a. The company will not pay a dividend in the foreseeable future,
so all earnings will be reinvested. Compute the value of CSCO using the residual income
model.
29.
Shunichi Kobayashi is valuing United Parcel Service (NYSE: UPS). Kobayashi has made the
following assumptions:
Book value per share is estimated at $ 9.62 on 31 December 2007.
EPS will be 22 percent of the beginning book value per share for the next eight years.
Cash dividends paid will be 30 percent of EPS.
At the end of the eight - year period, the market price per share will be three times the book
value per share. The beta for UPS is 0.60, the risk - free rate is 5.00 percent, and the equity risk
premium is 5.50 percent. The current market price of UPS is $ 59.38, which indicates a current
P/B of 6.2.
A. Prepare a table that shows the beginning and ending book values, net income, and cash
dividends annually for the eight - year period. B.
B. Estimate the residual income and the present value of residual income for the eight
years.
C. Estimate the value per share of UPS stock using the residual income model.
D. Estimate the value per share of UPS stock using the dividend discount model. How
does this value compare with the estimate from the residual income model?

Relative Valuation
30.
A firm reported 250million in Total assets and 140 million in debt. In the Income statement, it
reported 560 million in sales, the firm has 80 million shares trading at 7 each. Find the P/B
ratio, P/S ratio.

31.
IBM has 1.83 billion shares outstanding trading at 125 per share. Its Price -Book value ratio
was 12.1. Its Debt equity ratio was 76%. Current liabilities is Rs. 0. How much long-term debt
did IBM have?

32.
P&G traded at 3.5 times Sales. It was reporting a net profit margin on sales of 9.9%. What was
its P/E ratio?

33.
HP, Gateway, Dell
Sales NI Book value Market Value
Equity
HP 45226 624 13953 32963
Gateway 6080 85 1565 1944
Dell 31168 1246 4694 ?

34.
A firm has an equity market value of Rs. 100 million. It reported earnings of 5 million and
book value of 50 million. The firm is being used as a comparable to price an IPO firm with the
earnings per share of 2.50 and Book value per share is 30. What should be the value of the IPO
firm.
35.
You wish to evaluate Diamond Offshore Drilling using the relative valuation technique.
Information about Diamond and some of its competitors are listed below.
Company Ticker Price Earnings per Share Sales per Share
Diamond DO $20.49 $1.31 $5.32
Transocean RIG $20.95 $0.86 $8.77
Global Santa Fe GSF $24.13 $1.50 $8.60
Nabors NBR $36.50 $2.18 $11.42
Ensco ESV $29.19 $1.50 $4.87
Rowan RDC $21.42 $0.80 $6.41
Helmerich & Payne HP $28.80 $2.84 $14.13
Key Energy KEG $8.15 $0.38 $7.49
What is your estimate of Diamond’s value? Does Diamond appear to be overpriced, under-
priced, or properly priced on this basis?

36.
The following information is provided to you for the purpose of valuation
Balance sheet
Particulars Amt. (000)
Cash 4060
Accounts Receivable 1700
Inventory 1197
Other Current Assets 383
Total Current Assets 7340

Property , Plant & Equipment 3803

Intangible Assets 2610
Other Non-current Assets 174
Total Assets 13927

Accounts Payable 2037

Accrued Expenses 959
Total Current liabilities 2996

Long term Debt 2013

Other Long term liabilities 495

Share Capital (238000 shares of 10 each) 2380

Reserves 6043
Total Liabilities 13927

Details of Income
Particulars Amt. (000)
Net Income 1990
Interest 41
Income Tax 264
Depreciation 1270
The share price of the company is 63.06 per share. Calculate EV/EBITDA
37.
You wish to estimate the value of a stock using the Comps method. Selected financial
information for the company is shown below.
Company Information
Earnings per Share $5
EBITDA $2.2 million
Market Value of Long-Term Debt $10 million
Market Value of Preferred Stock $8 million
Cash $2 million
Number of Shares Outstanding 50,000
The industry average P/E ratio is 18.5 and the industry average EV/EBITDA ratio is 9.7.
a) Using earnings as a basis, what is your best estimate of the value of a share of the
company’s stock?
b) Using EBITDA as a basis, what is your best estimate of the value of a share of the
company’s stock?

Valuation of Preference shares

38.
The face value of the preference share is $500 and the stated dividend rate is 12%. The shares
are redeemable after 5 years period. Calculate the value of preference shares if the required rate
of return is 13%.

39.
Particulars A ltd.
Assets
Freehold Property 36,000
Plant & machinery 32,000
Investment -
Stock 8,800
Bank 43,680
Debtors 21,100
Total 141,580

Equity & Liabilities

Equity Share capital (of 10 each) 60,000
Preference share capital (of Rs. 10 each) 10,000
Reserves & Surplus 50,000
Creditors 21,580
Total 141,580

The Freehold property is undervalued by 5,000 and stock is overvalued by 3,000. Find the
value of the equity & preference per share if:
1. The preference shares are non-participating
2. The preference shares are participating, having 10% share in surplus
3. The preference shares are participating but have no preference
Startup Valuation

40.
Secure Mail is a small software company that has developed a new computer virus screening
program. The company is fully owned by its founder and has no debt outstanding. The firm has
been in existence only a year, has offered a beta version of the software for free to online users
but has never sold the product (revenues are zero). During its year of existence, the firm
incurred $ 15 million in expenses, thus recording an operating loss for the year of the same
amount. As a venture capitalist, you have been approached about providing $ 30 million in
additional capital to the firm. To value the firm, you decide to employ the venture capital
approach.
 The founder believes that the virus program will quickly find a market and that revenues
will be $ 300 million by the third year. 2. Looking at publicly traded companies that
produce anti-virus software, you come up with two companies that you feel are relevant
comparables.
 Following are the details of publicly traded companies that produce anti-virus software
that are considered as relevant comparables
Company Market Cap Debt Cash Enterprise Revenue
Value
Symantec 9388 2300 1890 9798 5874
McAfee 4167 0 394 3773 1308

 Since this business has a product, ready for the market, but has no history of commercial
success, a target rate of return of 50% is agreed upon.

41.
Charles Black, a chef at a five-star restaurant in New York City, has decided to leave his job
and start a new business, making and delivering healthy family meals, based on organic
produce, in a suburban town in New Jersey. The free cashflow of the startup is estimated to be
as follows:
Year 0 1 2 3 4 5
FCFF -60,000 -29,700 11,016 91,127 128,816 176,390

The free cash flow to the firm ($176,390) in year 5 (see table 15) will continue to grow at the
inflation rate (2% p.a.) for ten more years. At the end of year 15, we will assume that the
business is shut down and that there are no assets to salvage.The owner will continue to be the
only equity investor in the business and the debt ratio we assumed for the first five years will
hold for the next 10 years. The cost of capital will therefore remain at 14.84%. Calculate the
value of the startup.

A key factor in its expected success are the networking connections that Charles Black. The
value of the restaurant is therefore very dependent upon Mr. Black’s health and continued
involvement with the restaurant. A replacement chef for Mr. Black can be found (for an
equivalent salary to the $80,000 that we estimated for him), the revenues will drop by 20%,
every year, as a result of his absence. Calculate Key person discount
Year 0 1 2 3 4 5
FCFF -60,000 -45,900 -13,770 49,867 79,558 117,147

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