2 –Enterprise Valuation Opex Capital is a small investment advisory firm located

ID: 2741745 • Letter: 2

Question

2 –Enterprise Valuation

Opex Capital is a small investment advisory firm located in Portland, Oregon, that has been hired by Winston Winery to estimate the value of Hilco Wines. Hilco is a small winery that is being considered for purchase by Winston. Opex has obtained the financial statements of Hilco and prepared the following estimates of the firm’s free cash flow for the next five years:

Year Cash Flows

1 $100,000

2 $120,000

3 $135,000

4 $150,000

5 $175,000

At the end of five years, Opex has estimated that the winery should be worth approximately five times its Year 5 cash flow.

1. If the appropriate discount rate for valuing the winery is 15%, what is your estimate of the firm’s enterprise value?

2. Winston Winery plans to borrow $400,000 to help finance the purchase. What is Hilco’s equity worth?

Explanation / Answer

Solution 1

Enterprise value if the sum of present value of cash flows generated by the firm. Present value is cash flow times PV factor:

Year

Cash flow

PV factor 15%

100000

0.869565217

86956.52

120000

0.756143667

90737.24

135000

0.657516232

88764.69

150000

0.571753246

85762.99

175000

0.497176735

87005.93

439227.37

So Enterprise value would be 439227.37.

Solution 2

Worth of Equity = Enterprise value – Debt

= 439227.37 -400,000

= 39227.37

Hence, the worth of equity would be 39227.37.