Valuation Question - Valuation test from my interview?
might be a very easy question for many of you guys but i appreciate any serious replies :
I get this valuation test from my interview and I had some troubles with it. The test ask me to calculate both Enterprise Value and equity value.
The information I got is one company wishes to raise $100 million in equity in order to fund a factory, which will be constructed in 2010 and will cost $200 million (remaining $100 million will be funded through debt at an interest cost of 6%). Then I have the company's sales forcast included variable and fixed cost. I also have enough information to calculate the WACC. However, I don't know D&A, CapEx, change in opearting assets. Should I just make assumpition and calculate the DCF anyway?
I also have EV/EBITDA, P/E multiples from comparable table. but based on my calculation, the company's 2010 EBITDA and net earnings are both negative. so how do I use multiples to value the company?
Help please!
Thanks.
For depreciation, just depreciate the new asset (the factory) straight line over a period of time. Make some assumptions about salvage value and useful life that you can defend.
For changes in net working capital, you have the sales, so you can back into the accounts receivable via an assumption for DSO. You also have the COGS (variable costs) so you can back into inventory and AP with assumptions for DPO and inventory turns.
For CapEx, you can look at what the return on the factory asset is now, and looking at the sales forecast, back into the necessary capital expenditures to keep ROA roughly flat - it shouldn't change that much over time in a stable industry.
For the company's EBITDA, that really shouldn't be much of a calculation. In your case sales - variable exp. - fixed exp. = EBITDA. Is this really negative per what they've given you? I seriously hope you're not including $200mm in capital expense in your 2010 EBITDA calc.
At this point you should have everything you need to do a decent DCF with defendable assumptions. That's your Enterprise value. Subtract the $100mm debt and you have your Equity value.
I would then use the multiples as a sniff test and if you're way off the grid you may want to rethink some of your assumptions.
Hope that helps.
jhoratio, thx for the reply.
the case was a mini case so lots of information is missing. I did make assumptions about D&A, CapEx, etc; However, I assumed % revenue for D&A rather than depreciate the factory (guess i was wrong on that one).
For the EBITDA and Earnings, the factory has no sales in 2010 but still occur $100mm fixed cost, so the EBITDA and earnings are both negative. I didn't include the $200MM for the EBITDA calculation. I just used Operating income (EBIT) add back D&A that I assumed. The 2011's EBITDA and Earnings are both positive, and I have comparable tables for 2011 and 2012 as well. However, i think it is irrelevant as we are looking for their enterprise value and equity value in 2010.
I guess I basically got the DCF right, but still not sure how to use the multiples.
Thank you for your detailed answers though. Really appreciate it
tricky that they made 2010 sales 0, are you sure this is right? Well if 2010 profit numbers are negative, then you certainly can't apply multiples to them. I would apply your comparable multiples to 2011 and footnote about your assumption of 2010 being irrelevant.
Using 2011 isn't the correct methodology for a 2010 EV calculation, but its still something as 2011 multiples are lower than 2010 multiples as they account for increased EBITDA/earnings projections. Again, this is not something you normally do but in your circumstance it might make sense.
Having just a DCF analysis is kind of weak for valuation, as you want multiple ranges to come to a more defensible number.
yea, that is the tricky part. They showed a table and there was no sales in 2010. I would just use the 2011 and 2012 multiples as well.
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