Discounted cash flow valuation: Using the Discounted Cash Flow method and inform

Question

Discounted cash flow valuation: Using the Discounted Cash Flow method and information from Exhibit 10, estimate the value of FVC. First, calculate the free cash flow to FVC each year from 2008 to 2012. Second, discount the cash flows to 2007. Assume: discount rate r = 8%, growth rate for the steady period starting 2012 g = 4.5%. Clearly state your assumptions if any

Synergy valuation: FVC expects to realize from the transaction pre-tax cost synergies of $2 million in the first year and $4 million each year afterwards. What is the value of FVC using the Discounted Cash Flow method in question 5 taking into account the cost synergies realized from the transaction?

Actual Projected 2007 2008 2009 2010 2011 2012 Sales $49,364 $59,600 $66,000 $73,200 $81,200 $90,000 Cost of goods sold 37,044 43,816 48,750 54,104 59,958 66,200 Gross profit 12,320 15,784 17,250 19,096 21,242 23,800 Selling, general, and administrative 2,936 3,612 4,124 4,564 5,052 5,692 Other income—net 228 240 264 288 320 352 Income before taxes 9,612 12,412 13,390 14,820 16,510 18,460 Taxes 4,037 4,965 5,356 5,928 6,604 7,384 Net income $5,575 $7,447 $8,034 $8,892 $9,906 $11,076             Depreciation $1,508 $1,660 $1,828 $2,012 $2,212 $2,432 Net PPE $18,268 $22,056 $24,424 $27,088 $30,049 $33,306 Net working capital $16,840 $20,331 $22,515 $24,971 $27,700 $30,702

Explanation / Answer

With the given schedule, we can find Free Cash Flow as Net Income + Depreciation + Incremental PPE Outflow + Incremental Working Capital Outflow. The same is shown below:

Assuming the above data is in '000, then pre-tax cost synergies equal 2,000 in first year and 4,000 in subsequent years. Also, as can be observed by dividing tax from taxable income, tax rate is 40% appx.

Therefore, After-Tax synergies need to be reduced by tax out flow resulting in tax synergy of 1200 in first year and 2400 in next years. The resultant cash flows will then be:

Net Income $5,575 $7,447 $8,034 $8,892 $9,906 $11,076 Depreciation $1,508 $1,660 $1,828 $2,012 $2,212 $2,432 Incremnetal PPE ($18,268) ($3,788) ($2,368) ($2,664) ($2,961) ($3,257) Incremental Working Capital ($16,840) ($3,491) ($2,184) ($2,456) ($2,729) ($3,002) Free Cash Flow ($28,025) $1,828 $5,310 $5,784 $6,428 $7,249 Discounted Value ($28,025) 1692.59 4552.47 4591.53 4724.77 4933.55

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