Mini Case

Stock Valuation at Ysom, Inc.

Ysom, Inc. was founded recently by Professor Shin at Yonsei University and Professor Lee
affiliate institute of Yonsei University. The company manufactures sleep disorder diagnos
expecting rapid growth because of Korean population structure where the number of peo
sharply. The similar population structure and change are expected in China as well.

The company is equally owned by Prof. Shin and Prof. Lee. The original partnership agree
each of them 50,000 shares of stock. In the event either wished to sell stock, the shares fi
discounted price.

Although neither partner wants to sell, they have decided they should value their holding
have estimated the information about the firm.
Ysom, Inc. is expected to have sales of $1 million dollars in 2017, $2 million dollars in 201
million dollars in 2020, and its growth rate will slow to a long-run growth rate for the hea
Based on Ysom, Inc.’s competitors’ profitability and investment needs, you expect EBIT to
working capital requirements to 10% of any increase in sales, and net investment to be 1
exempt for first 4 years because it is a startup but it will be 40% after 4 years. The weight
because it is a startup. It is very common that the required rate of return for a startup is o
require 50% return on investment for similar startups, but the required return is assumed
does not have any debt and the outstanding number of shares is 100,000.

What is the value per share of the company’s stock? What is the value of Professor Shin’s
ersity and Professor Lee at Severance Hospital which is an
s sleep disorder diagnostic instruments. Yonsei Corp. is
where the number of people over 65 years old increases
d in China as well.

iginal partnership agreement between the professors gave

o sell stock, the shares first had to be offered to the other as a

hould value their holdings in the company. To get started, they

$2 million dollars in 2018, $4 million dollars in 2019, $10

growth rate for the health instrument industry of 4% by 2021.
eeds, you expect EBIT to be 30% of sales, increases in net
net investment to be 15% of any increase in sales. Its tax is
fter 4 years. The weighted average cost of capital is high
f return for a startup is over 30%. Let’s assume that investors
quired return is assumed to be 15% after year 4. The company
100,000.

value of Professor Shin’s Ownership?

 Year 2016 2017 2018
FCF Forecast ($ millions)
Sales 0 1.0 2.0
Growth rate from previous year
EBIT 0.3 0.6
(30% of sales) 30% 30%
Less: Income Tax 0 0
(Tax rate) 0% 0%
Less: Net Investment 0.2 0.2
(15% of Change in Sales) 15% 15%
Less: Increase in NWC 0.1 0.1
(10% of Change in Sales) 10% 10%
Free Cash Flow 0.0 0.4
Terminal Value
(Cost of Capital) 50% 50%
Total Free Cash Flow 0.0 0.4
PV of Total FCF
Enterprise Value
Stock Price ($)
Value of Prof. Shin's Ownership
2019 2020 2021

4.0 10.0 10.4

4%
1.2 3 3.12 0.0 0.4 0.7
30% 30% 30%
0 0 1.248
0% 0% 40%
0.3 0.9 0.1
15% 15% 15%
0.2 0.6 0.04
10% 10% 10%
0.7 1.5 1.8
16.8
50% 50% 15%
0.7 18.3 1.8
1.5 1.8 0.0