Part One: Equity Valuation Bart Industries Is About To Be Pu

Question

Part One: Equity Valuation Bart Industries is about to be purchased by Part One: Equity Valuation Bart Industries is about to be purchased by Kramer Enterprises. Both firms are in the rocks and mineral industry. As one of the founders of Bart Industries, you are concerned about the value of the equity in the firm. You have acquired the following data on your firm: Bart has 200,000 shares of stock authorized, with 120,000 shares outstanding and held by the current owners. The free cash flows for next year are estimated to be $642,000. The WACC for the firm is currently 13%. Bart has $320,000 of outstanding debt. The growth rate for Bart is estimated to be 5% for the future. Bart has a surplus of cash in the amount of $985,000. Required: What is the value of Bart’s equity?

Dr. Jack HW Helper · Accepted Answer

Valuing a firm accurately is critical for determining its equity value, especially in anticipation of a sale or acquisition. In this case, the valuation of Bart Industries, a company operating within the rocks and minerals sector, involves several key financial metrics and models. The goal is to estimate the firm's equity value based on the given data, which includes free cash flows, leverage, growth rate, and cash position. Step 1: Understanding the Valuation Framework The appropriate valuation approach here is the discounted cash flow (DCF) method, which involves estimating the firm’s enterprise value by projecting future free cash flows (FCF) and discounting them at the firm's weighted average cost of capital (WACC). This approach considers the firm's capital structure, growth prospects, and cash holdings. After calculating the enterprise value, adjustments are made for debt and cash to arrive at the equity value. Step 2: Calculating the Enterprise Value The simplified constant-growth DCF model applies in stable growth environments and is expressed as: Enterprise Value = FCF₁ / (WACC - g) Where: - FCF₁ = Free Cash Flow next year = $642,000 - WACC = 13% or 0.13 - g = 5% or 0.05 Plugging in the numbers: Enterprise Value = $642,000 / (0.13 - 0.05) = $642,000 / 0.08 = $8,025,000 Step 3: Adjustments for Cash and Debt The enterprise value represents the total value of the operating assets, including cash. To derive the equity value, subtract the firm's net debt from the enterprise value. The firm's debt is $320,000, and its surplus cash is $985,000. Net debt = Debt - Cash = $320,000 - $985,000 = -$665,000 A negative net debt indicates the firm holds more cash than debt, effectively increasing its equity value. Step 4: Calculating the Equity Value Equity value = Enterprise value + Cash - Debt Replacing the known amounts: Equity value = $8,025,000 + $985,000 - $320,000 = $8,690,000 It is important to recognize that since the firm holds more cash than debt, the net effect

Part One: Equity Valuation Bart Industries Is About To Be Pu

Part One: Equity Valuation Bart Industries is about to be purchased by

Paper For Above instruction

Step 1: Understanding the Valuation Framework

Step 2: Calculating the Enterprise Value

Step 3: Adjustments for Cash and Debt

Step 4: Calculating the Equity Value

Step 5: Determining Per-Share Equity Value

Conclusion

References