Assignment 2: Business Value Management

Name:Ilkin
Surname:Huseynzade
Group:MBA english 1st course Show detailed calculations in the spaces provided

Task 1:
Consider the following information about the target company’s recent financials and the industry data:
Target company financials
EBITDA €50m
Market value of debt €200m
Cash and short-term investments €45m
Number of outstanding shares 20m
Industry data
Average industry EV to EBITDA multiple 18.8 x (trailing)

1) Using the comparable company approach, estimate the enterprise value.

18,8X50=940eur

2) Estimate the implied value of equity.

EV-net debt=Equity value

940-(200-45)=785m euro

3) Calculate the target’s value per share.

758m/20m=39.25 eur

Task 2:
The firm is evaluating an expansion project. The projected cash flows and other data are shown in the table:

Project Data
Project life 3 years
Unit sales (per year) 1,200
Price (per unit) €60.00
Variable cost (per unit) €20.00
Fixed cost (per year) €3,000
Fixed capital investments €90,000
Fixed assets are depreciated straight-line over 3 years to book value of zero
Net working capital investments €15,000
Salvage value of fixed assets at the end of three years €10,000
Marginal tax rate 15%
Cost of capital 20%

1) Assuming that fixed capital investments and working capital investments are made at the start of the
project, what is the initial cash outlay?

90000+15000=105000-initial
 2) Determine the after-tax operating cash flows.
Reveniu 1200x60=72000
Variable cost 1200x20=24000
Fixed cost 3000
Depreciation 30000
EBIT=72000-24000-3000-30000=15000
Net income 15000(1-0.15)=12750
Operating cashflow 12750+30000=42750

3) Assuming the recovery of the net working capital investment and the sale of fixed assets at the end of
the projects life, calculate the terminal non-operating cash flow.

15000+10000=25000 eur

4) Calculate the net present value. Would the acceptance of the project add value to the firm?

0 +42750 +42750 +42750 +25000

--------------1-------------------2-----------------3-----------------X

-105000+42750(1.2+42.750)1.44+(42750+25000)(1.2)=-480

I would not invest because NPV is minus

Task 3:
The firm is considering the replacement of old equipment with new equipment. The characteristics of the old
and new equipment are given below:

Old Equipment New Equipment

Current book value €5,000
Current market value €2,000 Acquisition cost €25,000
Remaining life 5 years Useful life 5 years
Annual sales €20,000 Annual sales €20,000
Cash operating expenses (per year) €14,000 Cash operating expenses (per year) €7,000
Annual depreciation expense €1,000 Annual depreciation expense €5,000
Book value (end of year 5) €0 Book value (end of year 5) €0
Expected salvage value (end of year 5) €0 Expected salvage value (end of year 5) €4,000

If the replacement is made, an additional investment of €3,000 in net working capital will be required. The tax
rate is 20%, and the required rate of return on the project is 12%.

a) Calculate the initial cash outlay.

3000(losson disposal)+3000+25000=31000
 b) Calculate the incremental after-tax operating cash flows for Years 1 – 5.

Old equipment
(20000-14000-1000)x0.8+1000=5000
New equipment
(20000-7000-5000)x0.8+5000=11400

c) Calculate the terminal year after-tax non-operating cash flow.

(4000-0)x80%=3200

d) Calculate the project’s net present value. Would the replacement project result in added value?

11400 11400 11400 + 11400 + 1 4 6 00

-31000+ + + =11.912 ---> NPV
1.1 2 (1. 12)2 (1. 12)3 (1. 1 2)4 ( 1.12)5

Yes it will add value

Task 4:
The firm is planning to invest up to £65 million next year. The information about the available investment
projects is given in the table below. I would invest C,E,F,G because they have high PI

Project Initial investment, Internal rate of Net present value, Profitability index
millions of £ return millions of £
A 50 15% 12 12/50=0.24
B 35 19% 15 15/35=0.43
C 30 28% 42 42/30=1.4
D 25 26% 1 1/25=0.04
E 15 20% 10 10/15=0.66
F 10 37% 11 11/10=1.1
G 10 25% 13 13/10=1.3
H 1 18% 0.1 0.1/1=0.1
Assuming the projects are not divisible, use the profitability index(PI) as a criterion to determine the value-
maximizing combination of projects. Show the calculations of the profitability indexes in the final column of
the table.