Swimming Headphones

Assumption table

Variables T=0 T=1 T=2 T=3

Sales volume (units) 215,000 258,000 283,800
Increase in sales volume 20% 10%

Price ($ per units) 85.00 55.00 56.10

Increase in price 2%

Perpetual value growth rate

Engineers 10
Salary ($ per engineer) 350,000
Research and development 3,500,000

Equipment 13,500,000

Opportunity cost of warehouse 400,000 400,000 400,000

Cost ($ per unit) 40.00 40.00 40.00

S,G,& A (% of sales) 10%

Tax rate 34%

Canibalization (% of sales) 10%

Average price of basket not sold 85% 72.25 46.75 47.69
Average cost of basket not sold 85% 34.00 34.00 34.00

WACC
Capital structure (D/E) - Systech 54%
Debt-to-Assets (market value) 35%
Equity-to-Assets (market value) 65%
Cost of debt 10.00%
Taxes 34%
Swimming headphone Equity Beta 2.37 (see TN Exhibit 4)
Risk-Free Interest Rate 4%
Market Risk Premium 7%
Cost of equity 20.59%

Cost of capital (WACC) 15.69%

Swimming Headphones
Profit and loss T=0 T=1 T=2 T=3
Sales 16,721,625 12,983,850 14,567,880
Cost 7,869,000 9,442,800 10,387,080
Gross profits 8,852,625 3,541,050 4,180,800

S, G, & A + opportunity cost fo warehouse 2,072,163 1,698,385 1,856,788

Amortization of R&D 700,000 700,000 700,000
Depreciacion 2,700,000 2,700,000 2,700,000

EBIT 0 3,380,463 -1,557,335 -1,075,988

Tax 0 1,149,357 -529,494 -365,836

Net income 0 2,231,105 -1,027,841 -710,152

Dividends 0 0 0 0

Swimming Headphones
Balance Sheet T=0 T=1 T=2 T=3

Assets
Current assets
Cash 2,000,000 5,417,949 8,551,434 11,047,539
Accounts receivables 0 1,672,163 1,298,385 1,456,788
Inventories 0 1,170,514 908,870 1,019,752
Total current assets 2,000,000 8,260,625 10,758,688 13,524,078

PPE 13,500,000 13,500,000 13,500,000 13,500,000

Intangibles and others 3,500,000 3,500,000 3,500,000 3,500,000
Accumulated depreciation and amortization -3,400,000 -6,800,000 -10,200,000
Fixed assets, net 17,000,000 13,600,000 10,200,000 6,800,000

Total assets: 19,000,000 21,860,625 20,958,688 20,324,078

Liabilities and equity

Accounts payables 0 629,520 755,424 830,966

Total current liabilities 0 629,520 755,424 830,966

Long term debt 0 0 0 0

Total liabilities 0 629,520 755,424 830,966

Begining equity 19,000,000 19,000,000 21,231,105 20,203,264

Net income 0 2,231,105 -1,027,841 -710,152
Dividends 0 0 0 0
Equity issues 0 0 0 0

Ending equity 19,000,000 21,231,105 20,203,264 19,493,112

Total liabilities + equity 19,000,000 21,860,625 20,958,688 20,324,078

Check 0 0 0 0

Swimming Headphones
Statement of Cash Flow T=0 T=1 T=2 T=3

Operating activities:
Net Income 2,231,105 -1,027,841 -710,152
Depreciation and amortization 3,400,000 3,400,000 3,400,000

Accounts receivables -1,672,163 373,778 -158,403

Inventories -1,170,514 261,644 -110,882

Accounts payables 629,520 125,904 75,542

Cash from operating activities 0 3,417,949 3,133,485 2,496,105

Investment activities:
CAPEX -13,500,000 0 0 0
Intangibles and others -3,500,000 0 0 0

Cash from investing activities -17,000,000 0 0 0

Financing activities:
Long term debt 0 0 0
Equity inflow 19,000,000
Dividends 0 0 0

Cash from financing activities 19,000,000 0 0 0

Change in cash 2,000,000 3,417,949 3,133,485 2,496,105

Initial cash balance 0 2,000,000 5,417,949 8,551,434

Ending cash balance 2,000,000 5,417,949 8,551,434 11,047,539

Swimming Headphones
Incremental working capital T=0 T=1 T=2 T=3
Cash (% of sales) 5% 836,081 649,193 728,394
AR (% of sales) 10% 1,672,163 1,298,385 1,456,788
INV (% of sales) 7% 1,170,514 908,870 1,019,752
Current assets 3,678,758 2,856,447 3,204,934

AP (% of COGS) 8% 629,520 755,424 830,966

Current liabilities 629,520 755,424 830,966

NWC 2,000,000 3,049,238 2,101,023 2,373,967

Effect of the Change in NWC -1,049,238 948,215 -272,944

Swimming Headphones
Free Cash Flow T=0 T=1 T=2 T=3
Nopat 0 2,231,105 -1,027,841 -710,152
Depreciation + amortization 3,400,000 3,400,000 3,400,000
Research + development -3,500,000
CAPEX -13,500,000
Change in NWK -2,000,000 -1,049,238 948,215 -272,944
FCF -19,000,000 4,581,868 3,320,373 2,416,904
Terminal value in t=5
Net FCF -19,000,000 4,581,868 3,320,373 2,416,904

Swimming Headphones
Valuation

WACC 15.69%
NPV (terminal value as a growing perpetuity) 3,021,798
IRR 20.43%

T=0 T=1 T=2 T=3

-19,000,000 4,581,868 3,320,373 2,416,904

NPV (selling the brand, equipments, and WC) 1,676,053

IRR 18.43%
T=4 T=5 Terminal Value
297,990 312,890
5% 5%

57.22 58.37
2% 2%

2%

400,000 400,000

40.00 40.00

48.64 49.61
34.00 34.00
 T=4 T=5
15,602,199 16,709,955
10,906,434 11,451,756
4,695,765 5,258,200

1,960,220 2,070,996
700,000 700,000
2,700,000 2,700,000

-664,455 -212,796
-225,915 -72,351

-438,540 -140,445

0 0

T=4 T=5

13,874,713 16,989,574
1,560,220 1,670,996
1,092,154 1,169,697
16,527,086 19,830,267

13,500,000 13,500,000
3,500,000 3,500,000
-13,600,000 -17,000,000
3,400,000 0

19,927,086 19,830,267

872,515 916,140

872,515 916,140

0 0
872,515 916,140

19,493,112 19,054,572
 -438,540 -140,445
0 0
0 0

19,054,572 18,914,126

19,927,086 19,830,267
0 0

T=4 T=5

-438,540 -140,445
3,400,000 3,400,000

-103,432 -110,776
-72,402 -77,543

41,548 43,626

2,827,174 3,114,862

0 0
0 0

0 0

0 0

0 0

0 0

2,827,174 3,114,862

11,047,539 13,874,713

13,874,713 16,989,574
 T=4 T=5
780,110 835,498
1,560,220 1,670,996
1,092,154 1,169,697
3,432,484 3,676,190

872,515 916,140
872,515 916,140

2,559,969 2,760,050
-186,002 -200,081

T=4 T=5
-438,540 -140,445
3,400,000 3,400,000

-186,002 -200,081
2,775,458 3,059,474 Selling price 20,000,000
22,789,379 20,000,000 Net cash flow after selling the
2,775,458 25,848,853 brand, equipments, and working capital.

T=4 T=5
2,775,458 23,059,474
Swimming Headphones
Assumption table

Variables T=0 T=1 T=2 T=3

Sales volume (units) 215,000 258,000 283,800
Increase in sales volume 20% 10%

Price ($ per units) 85.00 55.00 56.10

Increase in price 2%

Perpetual value growth rate

Engineers 10
Salary ($ per engineer) 350,000
Research and development 3,500,000

Equipment 13,500,000

Opportunity cost of warehouse 400,000 400,000 400,000

Cost ($ per unit) 40.00 40.00 40.00

S,G,& A (% of sales) 10%

Tax rate 34%

Canibalization (% of sales) 10%

Average price of basket not sold 85% 72.25 46.75 47.69
Average cost of basket not sold 85% 34.00 34.00 34.00

WACC

Swimming Headphones
Profit and loss T=0 T=1 T=2 T=3

Swimming Headphones
Balance Sheet T=0 T=1 T=2 T=3

Swimming Headphones
Statement of Cash Flow T=0 T=1 T=2 T=3
Swimming Headphones
Incremental working capital T=0 T=1 T=2 T=3

Swimming Headphones
Free Cash Flow T=0 T=1 T=2 T=3

Swimming Headphones
Valuation

WACC 15.69% % Change

NPV (terminal value as a growing perpetuity) 3,021,798 0.00%
IRR 20.43%

T=0 T=1 T=2 T=3

-19,000,000 4,581,868 3,320,373 2,416,904

NPV (selling the brand, equipments, and WC) 1,676,053

IRR 18.43%

Sensibility table
% Change in variable
Variables -10% 10%

Sales volume (units) - First year 193,500 236,500

Increase in sales volume (year 2) 18.00% 22.00%

Price ($ per units) - first year 76.50 93.50

Price ($ per units) - second year 49.50 60.50

Increase in price (years 3,4 and 5) 1.80% 2.20%

Perpetual value growth rate 1.80% 2.20%

Engineers 9 11

Salary ($ per engineer) 315,000.0 385,000.0

Equipment 12,150,000 14,850,000

Opportunity cost of warehouse 360,000 440,000

Cost ($ per unit) 36 44

S,G,& A (% of sales) 9.00% 11.00%

Taxes 30.60% 37.40%

Canibalization (% of sales) 9.00% 11.00%

Average price of basket not sold 76.50% 93.50%

Average price of basket not sold 76.50% 93.50%

Debt-to-assets 31.50% 38.50%

Cost of debt 9.16% 11.20%

Swimming headphone Equity Beta 2.13% 2.61%

Risk-Free Interest Rate 3.60% 4.40%

Market Risk Premium 6.30% 7.70%

Cash (% of sales) 4.50% 5.50%

AR (% of sales) 9.00% 11.00%

INV (% of sales) 6.30% 7.70%

AP (% of COGS) 7.20% 8.80%

T=4 T=5 Terminal Value
297,990 312,890
5% 5%

57.22 58.37
2% 2%

2%

400,000 400,000

40.00 40.00

48.64 49.61
34.00 34.00

T=4 T=5

T=4 T=5

T=4 T=5
 T=4 T=5

T=4 T=5

T=4 T=5
2,775,458 23,059,474

Change in NPV
-10% 10%

1,607,214 4,436,382
-47% 47%

3,271,209 3,627,586
-5% 5%

2,206,399 3,837,197
-27% 27%

(2,328,408) 8,372,004
-177% 177%

3,215,430 3,684,107
-7% 7%

3,260,644 3,643,863
-6% 6%
3,632,049 3,266,746
5% -5%

3,632,049 3,266,746
5% -5%

4,153,912 2,744,883
20% -20%

3,635,027 3,263,767
5% -5%

7,772,818 (1,729,222)
157% -157%

3,750,319 2,293,272
24% -24%

3,253,619 3,649,628
-6% 6%

3,583,581 3,315,213
4% -4%

4,034,546 2,864,249
17% -17%

4,034,546 2,864,249
17% -17%

2,736,147 4,214,027
-21% 22%

3,827,313 3,084,474
11% -11%

4,816,594 1,491,072
59% -51%

3,867,186 3,047,430
12% -12%

5,237,488 1,919,092
52% -44%
3,539,139 3,359,656
3% -3%

3,628,880 3,269,915
5% -5%

3,575,035 3,323,760
4% -4%

3,359,823 3,538,971
-3% 3%
Swimming Headphones
Assumption table

Variables T=0 T=1 T=2 T=3

Sales volume (units) 215,000 258,000 283,800
Increase in sales volume 20% 10%

Price ($ per units) 85.00 55.00 56.10

Increase in price 2%

Perpetual value growth rate

Engineers 10
Salary ($ per engineer) 350,000
Research and development 3,500,000

Equipment 13,500,000

Opportunity cost of warehouse 400,000 400,000 400,000

Cost ($ per unit) 40.00 40.00 40.00

S,G,& A (% of sales) 10%

Tax rate 34%

Canibalization (% of sales) 10%

Average price of basket not sold 85% 72.25 46.75 47.69
Average cost of basket not sold 85% 34.00 34.00 34.00

WACC
Capital structure (D/E) 54%
Debt-to-Assets 35%
Equity-to-Assets 65%
Cost of debt 10.00%
Taxes 34%
Swimming headphone Equity Beta 2.37 (see TN Exhibit 4)
Risk-Free Interest Rate 4%
Market Risk Premium 7%
Cost of equity 20.59%

Cost of capital (WACC) 15.69%

Swimming Headphones
Profit and loss T=0 T=1 T=2 T=3

Swimming Headphones
Balance Sheet T=0 T=1 T=2 T=3

Swimming Headphones
Statement of Cash Flow T=0 T=1 T=2 T=3

Swimming Headphones
Incremental working capital T=0 T=1 T=2 T=3

Swimming Headphones
Free Cash Flow T=0 T=1 T=2 T=3

Swimming Headphones
Valuation

WACC 15.69% % Change

NPV (terminal value as a growing perpetuity) 3,021,798 0.00%
IRR 20.43%

T=0 T=1 T=2 T=3

-19,000,000 4,581,868 3,320,373 2,416,904

NPV (selling the brand, equipments, and WC) 1,676,053

IRR 18.43%

Breakeven table
Values
Variables Estimated Breakeven %

Sales volume (units) - First year 215,000 169,072 -21.36%

Price ($ per units) - first year 85 54 -37.06%

Price ($ per units) - second year 55 52 -6.29%

Cost ($ per unit) 40 43 6.35%

S,G,& A (% of sales) 10.00% 14.00% 40.00%

Swimming headphone Equity Beta 2.37% 2.88% 21.52%

WACC 15.69% 20.75% 32.25%

T=4 T=5 Terminal Value
297,990 312,890
5% 5%

57.22 58.37
2% 2%

2%

400,000 400,000

40.00 40.00

48.64 49.61
34.00 34.00
 T=4 T=5

T=4 T=5

T=4 T=5

T=4 T=5

T=4 T=5

T=4 T=5
2,775,458 23,059,474
Swimming Headphones
Assumption table

Variables T=0 T=1 T=2 T=3

Sales volume (units) 215,000 258,000 283,800
Increase in sales volume 20% 10%

Price ($ per units) 85.00 55.00 56.10

Increase in price 2%

Perpetual value growth rate

Engineers 10
Salary ($ per engineer) 350,000
Research and development 3,500,000

Equipment 13,500,000

Opportunity cost of warehouse 400,000 400,000 400,000

Cost ($ per unit) 40.00 40.00 40.00

S,G,& A (% of sales) 10%

Tax rate 34%

Canibalization (% of sales) 10%

Average price of basket not sold 85% 72.25 46.75 47.69
Average cost of basket not sold 85% 34.00 34.00 34.00

WACC
Capital structure (D/E) 54%
Debt-to-Assets 35%
Equity-to-Assets 65%
Cost of debt 10.00%
Taxes 34%
Swimming headphone Equity Beta 2.37 (see TN Exhibit 4)
Risk-Free Interest Rate 4%
Market Risk Premium 7%
Cost of equity 20.59%

Cost of capital (WACC) 15.69%

Swimming Headphones
Profit and loss T=0 T=1 T=2 T=3

Swimming Headphones
Balance Sheet T=0 T=1 T=2 T=3

Swimming Headphones
Statement of Cash Flow T=0 T=1 T=2 T=3

Swimming Headphones
Incremental working capital T=0 T=1 T=2 T=3

Swimming Headphones
Free Cash Flow T=0 T=1 T=2 T=3
Nopat 0 2,231,105 -1,027,841 -710,152
Depreciation + amortization 3,400,000 3,400,000 3,400,000
Research + development -3,500,000
CAPEX -13,500,000
Change in NWK -2,000,000 -1,049,238 948,215 -272,944
FCF -19,000,000 4,581,868 3,320,373 2,416,904
Terminal value in t=5
Net FCF -19,000,000 4,581,868 3,320,373 2,416,904

Swimming Headphones
Valuation

WACC 15.69%
NPV (terminal value as a growing perpetuity) 3,021,798
IRR 20.43%

T=0 T=1 T=2 T=3

-19,000,000 4,581,868 3,320,373 2,416,904

NPV (selling the brand, equipments, and WC) 1,676,053

IRR 18.43%
T=4 T=5 Terminal Value
297,990 312,890
5% 5%

57.22 58.37
2% 2%

2%

400,000 400,000

40.00 40.00

48.64 49.61
34.00 34.00
 T=4 T=5

T=4 T=5

T=4 T=5

T=4 T=5

T=4 T=5
-438,540 -140,445
3,400,000 3,400,000

-186,002 -200,081
2,775,458 3,059,474 Selling price 20,000,000
22,789,379 20,000,000 Net cash flow after selling the
2,775,458 25,848,853 brand, equipments, and working capital.

T=4 T=5
2,775,458 23,059,474
 TN Exhibit 4
Swimming Headphones
Beta estimation

Market Cap. Enterprise Value Equity

(US $) (US $) Beta
Sound DKE 4,958,500 16,026,750 3.40

Beats and rhythm 3,896,800 5,738,770 2.97

Audio Boost 1,248,799 2,844,760 3.56

Universal Sounds 1,424,908 3,178,883 2.99

Step 1: Calculate the unleverage beta (assuming that debt beta is zero)
Unleverage beta
Hamada Formula Beck and DeMarzo
Sound DKE 1.43 1.05

Beats and rhythm 2.26 2.01

Audio Boost 1.89 1.56

Universal Sound 1.65 1.34

Step 2: Average the unleverage betas

Unleverage beta 1.81 1.49

Step 3: Re-leverage the beta with Systech Capital structure (for this project)

Systech D/E 53.85%

Tax 34%
Swimming headphone equity beta 2.45 2.30

AVERAGE 2.37
Effective Tax

38%

34%

31%

34%