Probs 17 18 19: Use The Following Information Concerning Joh

Probs 17 18 19use The Following Information Concerning Johnson Machine

Probs Use the following information concerning Johnson Machine Tool Company in Problems 18.17, 18.18, and 18.19. Johnson’s income statement from the fiscal year that ended this past December is: Revenue $ 995 Cost of goods sold $ 652 Gross profit $ 343 Selling, general, and administrative expenses $ 135 Operating profit (EBIT) $ 208 Interest expense $ 48 Earnings before taxes $ 160 Taxes $ 64 Net income $ 96 All dollar values are in millions. Depreciation and amortization expenses last year were $42 million, and the company has $533 million of debt outstanding. 18.17 Multiples analysis: You are an analyst at a private equity firm that buys private companies, improves their operating performance, and sells them for a profit. Your boss has asked you to estimate the fair market value of the Johnson Machine Tool Company. Billy’s Tools is a public company with business operations that are virtually identical to those at Johnson. The most recent income statement for Billy’s Tools is as follows: Revenue $ 1,764 Cost of goods sold $ 1,168 Gross profit $ 596 Selling, general, & administrative expenses $ 211 Operating profit (EBIT) $ 385 Interest expense $ 12 Earnings before taxes $ 373 Taxes $ 147 Net income $ 226 All dollar values are in millions. Billy’s had depreciation and amortization expenses of $71 million last year and had 200 million shares and $600 million of debt outstanding as of the end of the year. Its stock is currently trading at $12.25 per share. Using the P/E multiple, what is the value of Johnson’s stock? What is the total value of Johnson Machine Tool Company? Billy Tools' depreciation and amortization expenses $71 million Billy Tools' number of shares outstanding 200 million Billy Tools' value of outstanding debt $600 million Billy Tools' current stock price $12.25 per share Johnson Machine Tools' depreciation and amortization expense $42 million Johnson Machine Tools' value of outstanding debt $533 million 18.17 Billy Tools P/E ratio = Johnson Machine Tools value of equity = Billy Tools' P/E ratio JMT's Net Income million JMT's total value = Value of Equity + Value of Debt million 18.18 Multiples analysis: Using the enterprise value/EBITDA multiple, what is the total value of Johnson Machine Tool Company? What is the value of Johnson’s stock? 18.18 Billy Tools' enterprise value = Billy Tools' equity value + Billy Tools' debt value million Billy Tools EBITDA = Billy Tools' EBIT + Depreciation and amortization expenses million Billy Tools' Enterprise value/EBITDA multiple = times Johnson's EBITDA = million Johnson's implied firm value = million Johnson's value of stock = Its Firm value - Its value of outstanding debt million 18.19 Multiples analysis: Which of the above multiples analyses do you believe is more appropriate? 18.19 While the value estimates in the previous questions are reasonably similar, the enterprise value/EBITDA multiple is more appropriate for this analysis. The reason is that the capital structures of Johnson and Billy’s differ considerably and the enterprise value/EBITDA multiple is less sensitive to differences in leverage. Billy Tools' debt ratio= Johnson's debt ratio = Prob 18..20 Income approaches:You are using the FCFF approach to value a business.You have estimated that the FCFF for next year will be $123.65 million and that it will increase at a rate of 8 percent for each of the following four years. After that point, the FCFF will increase at a rate of 3 percent forever. If the WACC for this firm is 10 percent, and it has no NOA, what is it worth? Present Value of Firm = PV of the free cash flows during Years 1-5 + PV of the Terminal Value at the end of Year 5 Present Value of the 5-year growing annuity (PVAn): PVAn = [CF1/(WACC - g) ] x [1-{(1+g)/(1+WACC)}n] Present Value of the Terminal Value in Year 5 (PV(TV5): PV(TV5) = [CF1(1+g1)4(1+g2)]/[(WACC-g2)][1/(1+WACC)5] Next year's FCF = $123,650,000 Growth rate of FCF in Years 1-5 (g1)= 8% Number of years of 8% growth= 5 years Growth rate in second phase (g2)= 3% per year, forever WACC = 10% PVAn = PV(TV5) = PVFirm = Prob 18..21 Valuing a private business: You want to estimate the value of a privately owned restaurant that is financed entirely with equity. Its most recent income statement is as follows: Revenue $ 3,000,000 Cost of goods sold $ 600,000 Gross profit $ 2,400,000 Salaries and wages $ 1,400,000 Selling expenses $ 100,000 Operating profit (EBIT) $ 900,000 Taxes $ 315,000 Net income $ 585,000 You note that the profitability of this restaurant is significantly lower than that of comparable restaurants, primarily due to high salary and wage expenses. Further investigation reveals that the annual salaries for the owner and his wife, the firm’s accountant, are $900,000 and $300,000, respectively. These salaries are much higher than the industry median salaries for these two positions of $100,000 and $50,000, respectively. Compensation for other employees ($200,000 in total) appears to be consistent with the market rates. The median P/E ratio of comparable restaurants with no debt is 10. What is the total value of this restaurant? Industry median Owner's annual salary $ 900,000 $ 100,000 Owner's wife's salary $ 300,000 $ 50,000 Median PE ratios (no-debt firms) 10 The Income statement must be adjusted to reflect "realistic" salaries and wages Revenue Cost of Goods Sold Gross Profit Salaries and Wages Selling Expenses Operating Profit (EBIT) Taxes Net Income The Firm's value can then be estimated by multiplying the adjusted net income by the Industry median PE ratio Firm's total value = Net Income * Industry median PE ratio prob 18..23 You plan to start a business that sells waterproof sun block with a unique formula that reduces the damage of UVA radiation 30 percent more effectively than similar products on the market. You expect to invest $50,000 in plant and equipment to begin the business. The targeted price of the sun block is $15 per bottle. You forecast that unit sales will total 1,500 bottles in the first month and will increase by 20 percent in each of the following months during the first year. You expect the cost of raw materials to be $3 per bottle. In addition, monthly gross wages and payroll are expected to be $13,000, rent is expected to be $3,000, and other expenses are expected to total $1,000. Advertising costs are estimated to be $35,000 in the first month but to remain constant at $5,000 per month during the following eleven months. You have decided to finance the entire business at one time using your own savings. Is an initial investment of $75,000 adequate to avoid a negative cash balance in any given month? If not, how much more do you need to invest upfront? How much do you need to invest upfront to keep a minimum cash balance of $5,000? What is the break-even point of the business? Initial investment for plant and equipment $ 50,000 Unit selling price $ 15.00 Unit sales in first month 1500 bottles Growth in sales after 1st month (for Year%) per month Cost of raw materials per bottle $ 3.00 Monthly gross wages and payroll $13,000 Rent per month 3000 Other expense per month 1000 Advertising costs (1st month) $35,000 Monthly advertsing costs (Months 2-12) $5,000 Initial cash balance $75,000 Desired minimum monthly cash balance $5,000 Monthly Cash Budget Month Beginning Cash Balance Cash Receipts Cash Sales Total Cash Available Cash Payments Operations Raw Material Gross Wages and Payroll Advertising Rent Other Expenses Operations Total Financing and Investments Capital Expenditures Total Cash Payments Ending Cash Balance Answer: No, a beginning cash balance of $75,000 is not adequate to avoid a negative cash balance even in the first three months. Since, there is a maximum shortfall of $9,400 in Month 2, you will need to invest an additional amount of $9,400 to avoid the shortfall in Month 2, i.e., $84,400. If a $5,000 desired minimum cash balance is needed, the initial cash balance will have to be increased by that amount, i.e., to $89,400. Break-even point calculation: In Month 1 Month 1 Months 2-12 Total fixed costs = Contribution margin = Break-even sales = bottles Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Expected sales per month Cumulative sales per month Cumulative break-even Break-even sales=Fixed costs/(Price-Variable costs) Prob 18..24 For the previous question, assume that you do not have sufficient savings to cover the entire amount required to start your sun-block business. You are going to have to get external financing. A local banker whom you know has offered you a six-month loan of $20,000 at an APR of 12 percent. You will pay interest each month and repay the entire principal at the end of six months. Assume that instead of making a single up-front investment, you are going to finance the business by making monthly investments as cash is needed in the business. If the proceeds from the loan go directly into the business on the first day and are therefore available to pay for some of the capital expenditures, how much money do you need to pull out of your savings account every month to run the business and keep the cash balances positive? Bank loan = $ 20,000 Interest rate= 12% Monthly interest payment = $ 200 Loan paid off in Month 6 Monthly Cash Budget Month Beginning Cash Balance Cash Receipts Investments by owner Cash Sales Total Cash Available Cash Payments Operations Raw Material Gross Wages and Payroll Advertising Rent Other Expenses Operations Total Financing and Investments Capital Expenditures Debt/Interest Payment Total Cash Payments Ending Cash Balance Answer: