c cost of tion of sponsorsh are paying for similar golf courses (málRel course f

Question

c cost of tion of sponsorsh are paying for similar golf courses (málRel course from scratch (cost approach). Additionally, for the valuation obui in sport, analysts should employ the income appoch along with th Pons cost approach methods that are currently used. All three methods a results should be compared when the analyst chooses the final estimr d, and oh alos a ers are paying for valid, and the et timate of value, check 2. Give examples of ways in which a sport team majority owner couldp 3. In a discounted cash flow analysis, what happens to the NPV 4. Give examples of how a sport franchise can use related-party transaction 1. In Exhibit 10.8, why do the Expos have the highest price-to-revenue m Vi fiduciary duties and financially harm the minority shareholders.ol being equal, the discount rate goes up? What happens to NPV if the rate for the terminal value (perpetual growth rate) rises? else the growth sactions to reduce its net income. For each example, how does it reduce net income? 5. When an analyst is determining the value of a private company owned 100% by a single investor by analyzing the share prices of publicly traded companis what adjustments must he or she make in order to determine a final value? E problems 1. If the minority price for a single share of stock of a company is $20, if there are 500 thousand shares of stock, and a person nff pany for $14 5 mill

Explanation / Answer

1) Price/Revenue multiple of Expos= Valuation/Revenue=96859000/34171000= 2.83 suggests the Valuation of Expos is very high relative to its Revenue.

Price of Company by constant growth model is, P=D1/(r-g)=E0*payout ratio*(1+g)/(r-g)

as NPM=E0/S where S=Revenue and NPM is net profit margin.E0 is earnings per share ,g is growth of stock, D1is Dividend/share following year, D1=D0(1+g)= E0*payout ratio*(1+g)

Thus P=NPM*S*payout ratio*(1+g)/(r-g) => P/S=NPM*payout ratio*(1+g)/(r-g)

Expos high multiple suggests any or a combination of following  i) high growth g in earnings in the future. The high growth of Expos has pushed its Valuation upwards, starting with low Revenue Base the High growth makes the numerator that is valuation very high.compared to smaller Revenue. ii)High NPM directly increases the P/S multiple suggests high NPM is pushing the P/S upwards iii) A high payout ratio which is also a probable reason

2) A sports team majority owner could act in ways that could cause losses to sports team acting in his own ways selfishly so that minority shareholders are harmed. Majority shareholder could act his own way and rule out minority shareholders from making team decisions as team selections and various team endeavors which could be detrimental to the interests of the minority shareholders.

3) NPV= Present Value of future after tax cash flows= CF1/(1+r) + CF2/(1+r)2+......+CFT/(1+r)T+CFT(1+g)/(1+r)T+1+CFT(1+g)2/(1+r)T+2+......infinity, where CFs are after tax cash flows, r is discount rate and T is time to maturity, g is perpetual growth rate of Terminal Cash flow CFT . Terminal Value(TV) at( t=T) = PV of all future Cash flow at time( t=T)=PV of CFT(1+g)/(1+r) +CFT(1+g)2/(1+r)2+......infinity is GP with first term= a=CFT(1+g)/(1+r) and common ratio=cr =(1+g)/(1+r)  So TV= a/(1-cr)=CFT(1+g)/(1+r)/(1-((1+g)/(1+r) )= CFT(1+g)/(1+r)/((1+r)-((1+g)/(1+r) )=CFT(1+g)/(r-g) cancelling 1/1+r in numerator and denominator.

=>NPV=CF1/(1+r) + CF2/(1+r)2+......+CFT/(1+r)T + CFT(1+g)/(r-g)

The above relation suggests that as r goes up all denominators of above series goes up thus NPV shall decrease, r is inversely related to NPV. As r goes up denominators values goes up these makes overall value goes down, as r goes down denominator values goes down these makes overall value goes up thus NPV goes up.

Also above relation suggests that NPV is directly dependent on TV growth g ,thus as g goes down TV goes down and when g goes up the TV goes up.

4)Sport franchise can enter into transactions with the related parties as family members , associates and employees that can create losses to the franchise at the expense of related parties these losses could be carried over to net income thereby reducing the net income. CEO of sport franchise could make a deal with a close associate to make sell at a hefty discount due to some mutual arrangement beneficial to both this can create losses in account books of franchise at the expense of this transaction.

5) When Determining price of pvt Co using publicly traded company multiple we should account for the control premium which takes into account the controlling interest of pvt company as compared to public company which has a lack of control. The multiple of the publicly traded company should be multiplied by 1+[control premium/(1+D/E)] so that final multiple obtained gives fair estimate of pvt company multiple and hence its value.

Determining value through DCF requires for the discount rate i.e. cost of capital to be adjusted higher as raising finance for pvt company is more expensive, usually for a similar risky public company CAPM is determined and to it is added premiums for lack of marketability(liquidity) and lack of control as CAPM(pvt)=CAPM(public)+illiquidity premium+LOC premium+size premium the size premium indicates risk of being a small company,LOC is lack of control premium=1-(1/(1+control premium)).

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