VALUATION PROJECT Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

VALUATION PROJECT Case Solution

PART I: CREATE PRO-FORMA FINANCIAL STATEMENTS

Forecast all the line items in the income statement and balance sheet. In the table below, write down all the line items that you chose to forecast in the following tables (if you run out of room, add a new line to the table).

Income Statement Line Item	Forecast method
Revenue	Assumed 3% growth, from 10K’s
Cost of goods sold	Assumed 3% as inflation rate
SGA Expenses	Assumed 3 percent
Depreciation	Assumed same as per 2015
Interest Expenses	Calculation by multiplying cost of debt into LT debts
Other Expenses	Assumed moving average for last 4 years
Income Tax	Assumed 30%

Balance Sheet Line Item	Forecast Method
Cash	Assumed 7% of sales, in line with historical values
A/R, Inventories, PP&E, and others	Calculated by taking moving averages

How did you forecast depreciation?

The Depreciation is assumed as same for all the proceeding years as in the year 2015

How did you forecast your interest expense?

The Interest Expense has been calculated by multiplying the interest rate that is cost of debt by the long term debts.

What did you use as your plug number and how did you do this?

The Plug is used to balance the Total assets and Total liabilities & equity in the balance sheet. The Long term Debt is used as a plug in order to gain the extra financing required for the operation of the company. The Plug is calculated by taking the difference in the total assets and total liabilities & equity.

Calculate the numbers in “Useful stuff” below the income statement and balance sheet (these include EBIAT, NWC, etc.).

Useful stuff	2012	2013	2014	2015	2016	2017	2018	2019
CAPEX1 (change in PP&E gross)	10119	6632	10496	10242	-5121.0	2560.5	-1280.3	640.1
CAPEX2 (change in PP&E gross + change in other LTA)	49472.0	20790.0	36063.0	46188.0	-23094.0	11547.0	-5773.5	2886.8
Delta LT assets	47028.0	15303.0	29594.0	37793.0	41735.0	22804.0	5483.5	14143.8
NWC	19111.0	29628.0	5083.0	8768.0	21758.9	21151.5	15622.8	16513.5
Delta NWC	2093.0	10517.0	-24545.0	3685.0	12990.9	-607.3	-5528.7	890.7
Delta LT liabilities	7526.0	20481.0	17051.0	33670.0	46371.4	13257.2	-9610.3	4799.9

PART II: FORECAST FREE CASH FLOWS AND FLOWS TO EQUITY

Calculate your free cash flows (FCF) using equations (3) and (4) from the book. Calculate your flows to equity (FTE) in the table provided in the excel template. Copy that table below (format so it fits):

	2012	2013	2014	2015	2016	2017	2018	2019
FCF = EBIAT - DeltaNWC - DeltaLTA (3)	2843.0	16422.0	39508.0	18495.0	7626.1	42605.5	67371.2	54891.0
FCF = EBIAT - DeltaNWC - CAPEX2 + DEPR (4)	3676.0	17692.0	40985.0	21357.0	83712.1	65119.5	89885.2	77405.0

FTE = NI - DeltaNWC - CAPEX2 + DEPR + DeltaLTLia	-3350.0	26211.0	45043.0	37191.0	111183.1	58917.6	60157.1	61287.1

PART III: DTERMINE YOUR DISCOUNT RATES

Determine your equity discount rate Re using the CAPM and add it to the Excel template. Describe how you did this below.

The Re (Equity discount rate) is calculated by the using the formula Re = Rf + B*(Rm-Rf) of the Capital Asset Pricing Model. The Beta is taken as 1.03 from the google finance. And the Risk Free rate is taken as 0.26% that is 1 month Treasury bill rate and the Market return is assumed as 6 percent. The Re is calculated as 6.17 percent.

Determine your debt discount rate Rd. Describe how you did this below.

The Debt rate is calculated by dividing the interest expense from the Long Term Debt. In order to provide a better and accurate figure, the four year interest expense was divided by the 4 year long term debt. The Debt discount rate is calculated as 1.26 percent......................

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