Investment Banking

Valuation, Leveraged Buyouts,

and Mergers & Acquisitions
DCF Analysis - Completed

JOSHUA ROSENBAUM
JOSHUA PEARL

ValueCo Corporation
Discounted Cash Flow Analysis
($ in millions, fiscal year ending December 31)
Operating Scenario
1
Mid-Year Convention
Y

Operating Scenario
Historical Period

CAGR

2005
$780.0
NA

2006
$850.0
9.0%

2007
$925.0
8.8%

COGS
Gross Profit
% margin

471.9
$308.1
39.5%

512.1
$337.9
39.8%

555.0
$370.0
40.0%

SG&A
EBITDA
% margin

198.9
$109.2
14.0%

214.6
$123.3
14.5%

Depreciation & Amortization

EBIT
% margin

15.6
$93.6
12.0%

Taxes
EBIAT
Plus: Depreciation & Amortization
Less: Capital Expenditures
Less: Increase in Net Working Capital

Sales
% growth

Unlevered Free Cash Flow

WACC
Discount Period
Discount Factor
Present Value of Free Cash Flow

2010
$1,144.8
6.0%

2011
$1,190.6
4.0%

2012
$1,226.3
3.0%

2013
$1,263.1
3.0%

9.6%

600.0
$400.0
40.0%

648.0
$432.0
40.0%

686.9
$457.9
40.0%

714.4
$476.2
40.0%

735.8
$490.5
40.0%

757.9
$505.2
40.0%

4.8%

231.3
$138.8
15.0%

12.7%

250.0
$150.0
15.0%

270.0
$162.0
15.0%

286.2
$171.7
15.0%

297.6
$178.6
15.0%

306.6
$183.9
15.0%

315.8
$189.5
15.0%

4.8%

17.0
$106.3
12.5%

18.5
$120.3
13.0%

13.3%

20.0
$130.0
13.0%

21.6
$140.4
13.0%

22.9
$148.8
13.0%

23.8
$154.8
13.0%

24.5
$159.4
13.0%

25.3
$164.2
13.0%

4.8%

35.6
$58.0

40.4
$65.9

45.7
$74.6

49.4
$80.6

53.4
$87.0

56.6
$92.3

58.8
$96.0

60.6
$98.8

62.4
$101.8

15.6
(15.0)

17.0
(18.0)

18.5
(18.5)

20.0
(20.0)

21.6
(21.6)
(8.0)

22.9
(22.9)
(6.5)

23.8
(23.8)
(4.6)

24.5
(24.5)
(3.6)

25.3
(25.3)
(3.7)

$79.0

$85.8

$91.4

$95.3

$98.1

0.5
0.95
$75.0

1.5
0.86
$73.4

2.5
0.77
$70.4

3.5
0.69
$66.1

4.5
0.63
$61.4

13.3%

11.0%

$189.5
7.0x
$1,326.3
0.59
$787.1
69.4%

Enterprise Value

$1,133.3

6.0x
1,060
1,040
1,021
1,002
984

Enterprise Value
Exit Multiple
6.5x
7.0x
1,119
1,177
1,098
1,155
1,077
$1,133
1,057
1,112
1,038
1,091

Implied Equity Value and Share Price

Enterprise Value
Less: Total Debt
Less: Preferred Securities
Less: Noncontrolling Interest
Plus: Cash and Cash Equivalents
Implied Equity Value

8.0x
1,295
1,270
1,246
1,222
1,199

$17.17

0.0
10.0%
10.5%
11.0%
11.5%
12.0%

4.8%

$98.1
11.0%
$1,326.3
3.0%

Implied EV/EBITDA
Enterprise Value
LTM 9/30/2008 EBITDA

50.0

Implied Share Price

('08 - '13)
4.8%

Implied Perpetuity Growth Rate

$858.3

Implied Share Price

7.5x
1,236
1,213
1,190
1,167
1,145

Implied Perpetuity Growth Rate

Terminal Year Free Cash Flow (2013E)
WACC
Terminal Value

$1,133.3
(300.0)
25.0

WACC

Terminal Value
Terminal Year EBITDA (2013E)
Exit Multiple
Terminal Value
Discount Factor
Present Value of Terminal Value
% of Enterprise Value

CAGR

2009
$1,080.0
8.0%

$346.3

WACC

Projection Period
2008
$1,000.0
8.1%

Enterprise Value
Cumulative Present Value of FCF

1,133.3
10.0%
10.5%
11.0%
11.5%
12.0%

('05 - '07)
8.9%

Base

$1,133.3
146.7

Implied EV/EBITDA

6.0x
0.9%
1.3%
1.7%
2.2%
2.6%

Implied Perpetuity Growth Rate

Exit Multiple
6.5x
7.0x
1.5%
2.1%
2.0%
2.5%
2.4%
3.0%
2.8%
3.4%
3.3%
3.9%

7.7x

7.5x
2.6%
3.0%
3.5%
3.9%
4.4%

8.0x
3.0%
3.5%
3.9%
4.4%
4.8%

ValueCo Corporation
Sensitivity Analysis
($ in millions)

1,133.3
10.0%
10.5%
11.0%
11.5%
12.0%

6.0x
1,060
1,040
1,021
1,002
984

6.5x
1,119
1,098
1,077
1,057
1,038

Exit Multiple
7.0x
1,177
1,155
$1,133
1,112
1,091

Implied Equity Value

7.5x
1,236
1,213
1,190
1,167
1,145

8.0x
1,295
1,270
1,246
1,222
1,199

WACC

WACC

Enterprise Value
858.3
10.0%
10.5%
11.0%
11.5%
12.0%

0.0
10.0%
10.5%
11.0%
11.5%
12.0%

6.0x
17.17
17.17
17.17
17.17
17.17

6.0x
0.9%
1.3%
1.7%
2.2%
2.6%

6.5x
17.17
17.17
17.17
17.17
17.17

Implied Perpetuity Growth Rate

Exit Multiple
6.5x
7.0x
1.5%
2.1%
2.0%
2.5%
2.4%
3.0%
2.8%
3.4%
3.3%
3.9%

6.5x
844
823
802
782
763

Exit Multiple
7.0x
902
880
$858
837
816

7.5x
961
938
915
892
870

8.0x
1,020
995
971
947
924

PV of Terminal Value as % of Enterprise Value

7.5x
17.17
17.17
17.17
17.17
17.17

7.5x
2.6%
3.0%
3.5%
3.9%
4.4%

8.0x
17.17
17.17
17.17
17.17
17.17

8.0x
3.0%
3.5%
3.9%
4.4%
4.8%

WACC

17.2
10.0%
10.5%
11.0%
11.5%
12.0%

Exit Multiple
7.0x
17.17
17.17
$17.17
17.17
17.17

WACC

WACC

WACC

Implied Share Price

6.0x
785
765
746
727
709

0.7
10.0%
10.5%
11.0%
11.5%
12.0%

7.7
10.0%
10.5%
11.0%
11.5%
12.0%

6.0x
66.6%
66.3%
66.1%
65.8%
65.6%

6.0x
7.2x
7.1x
7.0x
6.8x
6.7x

6.5x
68.4%
68.1%
67.9%
67.6%
67.3%

Exit Multiple
7.0x
69.9%
69.7%
69.4%
69.2%
68.9%

Implied Enterprise Value / LTM EBITDA

Exit Multiple
6.5x
7.0x
7.6x
8.0x
7.5x
7.9x
7.3x
7.7x
7.2x
7.6x
7.1x
7.4x

7.5x
71.4%
71.1%
70.9%
70.6%
70.4%

8.0x
72.7%
72.4%
72.2%
72.0%
71.7%

7.5x
8.4x
8.3x
8.1x
8.0x
7.8x

8.0x
8.8x
8.7x
8.5x
8.3x
8.2x

ValueCo Corporation
Working Capital Projections
($ in millions)
Historical Period
2005
Sales
Cost of Goods Sold

2006

Projection Period
2007

2008

2009

2010

2011

2012

2013

$780.0
471.9

$850.0
512.1

$925.0
555.0

$1,000.0
600.0

$1,080.0
648.0

$1,144.8
686.9

$1,190.6
714.4

$1,226.3
735.8

$1,263.1
757.9

123.2
94.6

141.1
104.0

152.6
115.6

165.0
125.0

178.2
135.0

188.9
143.1

196.4
148.8

202.3
153.3

208.4
157.9

Prepaid Expenses and Other

Total Current Assets

7.1
$224.9

8.5
$253.6

9.3
$277.5

10.0
$300.0

10.8
$324.0

11.4
$343.4

11.9
$357.2

12.3
$367.9

12.6
$378.9

Current Liabilities
Accounts Payable
Accrued Liabilities
Other Current Liabilities
Total Current Liabilities

65.2
69.9
15.6
$150.7

66.0
83.2
20.4
$169.6

69.4
92.5
23.1
$185.0

75.0
100.0
25.0
$200.0

81.0
108.0
27.0
$216.0

85.9
114.5
28.6
$229.0

89.3
119.1
29.8
$238.1

92.0
122.6
30.7
$245.3

94.7
126.3
31.6
$252.6

$74.2
9.5%

$84.0
9.9%

$92.5
10.0%

$100.0
10.0%

$108.0
10.0%

$114.5
10.0%

$119.1
10.0%

$122.6
10.0%

$126.3
10.0%

($9.8)

($8.5)

($7.5)

($8.0)

($6.5)

($4.6)

($3.6)

($3.7)

Current Assets
Accounts Receivable
Inventories

Net Working Capital

% sales
(Increase) / Decrease in NWC
Assumptions
Days Sales Outstanding
Days Inventory Held
Prepaids and Other CA (% of sales)

57.7
73.2

60.6
74.1

60.2
76.0

60.2
76.0

60.2
76.0

60.2
76.0

60.2
76.0

60.2
76.0

60.2
76.0

0.9%

1.0%

1.0%

1.0%

1.0%

1.0%

1.0%

1.0%

1.0%

Days Payable Outstanding

Accrued Liabilities (% of sales)
Other Current Liabilities (% of sales)

50.4

47.0

45.6

45.6

45.6

45.6

45.6

45.6

45.6

9.0%
2.0%

9.8%
2.4%

10.0%
2.5%

10.0%
2.5%

10.0%
2.5%

10.0%
2.5%

10.0%
2.5%

10.0%
2.5%

10.0%
2.5%

ValueCo Corporation
Weighted Average Cost of Capital Analysis
($ in millions)

WACC Calculation
Capital Structure

Comparable Companies Unlevered Beta

Predicted

Debt-to-Total Capitalization

30.0%

Equity-to-Total Capitalization

70.0%

Cost of Debt
Cost of Debt
Tax Rate
After-tax Cost of Debt

6.0%
38.0%
3.7%

Cost of Equity
Risk-free Rate(1)
Market Risk Premium(2)
Levered Beta
Size Premium(3)
Cost of Equity

Company
Adler Industries
Lanzarone International
Lajoux Global
Momper Corp.
McMenamin & Co.
Mean
Median

Levered Beta(4)
1.11
1.08
1.35
1.25
1.19

Market
Value of Debt
$575.0
515.0
715.0
550.0
250.0

Market

Debt/

Marginal

Unlevered

Value of Equity
$2,600.0
1,750.0
1,050.0
1,000.0
630.0

Equity

Tax Rate

Beta

1.20
1.19

22.1%
29.4%
68.1%
55.0%
39.7%

0.98
0.91
0.95
0.93
0.96

38.0%
38.0%
38.0%
38.0%
38.0%

0.95
0.95

42.9%
39.7%

ValueCo Relevered Beta

Mean
Unlevered
Beta
0.95

4.0%
7.1%
1.20
1.65%
14.1%

Relevered Beta

Target
Debt/
Equity
42.9%

Target
Marginal
Tax Rate
38.0%

Relevered
Beta
1.20

WACC

11.0%

(1) Interpolated yield on 20-year U.S. Treasury

(2) Obtained from Ibbotson SBBI Valuation Yearbook
(3) Low-Cap Decile size premium based on market capitalization, per Ibbotson
(4) Sourced from Barra

Debt-to-Total
Capitalization

WACC Sensitivity Analysis

0.1
10.0%
20.0%
30.0%
40.0%
50.0%

5.0%
11.9%
11.3%
10.8%
10.3%
9.8%

5.5%
11.9%
11.4%
10.9%
10.4%
10.0%

Pre-tax Cost of Debt

6.0%
11.9%
11.5%
11.0%
10.6%
10.1%

6.5%
11.9%
11.5%
11.1%
10.7%
10.3%

7.0%
12.0%
11.6%
11.2%
10.8%
10.4%

Assumptions Page 1 - Income Statement and Cash Flow Statement

Year 1
2009

Year 2
2010

Year 3
2011

Year 4
2012

Projection Period
Year 5
Year 6
2013
2014

Year 7
2015

Year 8
2016

Year 9
2017

Year 10
2018

Income Statement Assumptions

Sales (% growth)
Base
Management
Upside
Downside 1
Downside 2

1
2
3
4
5

8.0%
8.0%
10.0%
12.0%
5.0%
2.0%

6.0%
6.0%
8.0%
10.0%
4.0%
2.0%

4.0%
4.0%
6.0%
8.0%
3.0%
2.0%

3.0%
3.0%
4.0%
6.0%
3.0%
2.0%

3.0%
3.0%
3.0%
4.0%
3.0%
2.0%

3.0%
3.0%
3.0%
4.0%
3.0%
2.0%

3.0%
3.0%
3.0%
4.0%
3.0%
2.0%

3.0%
3.0%
3.0%
4.0%
3.0%
2.0%

3.0%
3.0%
3.0%
4.0%
3.0%
2.0%

3.0%
3.0%
3.0%
4.0%
3.0%
2.0%

Cost of Goods Sold (% sales)

Base
Management
Upside
Downside 1
Downside 2

1
2
3
4
5

60.0%
60.0%
60.0%
59.0%
61.0%
62.0%

60.0%
60.0%
60.0%
59.0%
61.0%
62.0%

60.0%
60.0%
60.0%
59.0%
61.0%
62.0%

60.0%
60.0%
60.0%
59.0%
61.0%
62.0%

60.0%
60.0%
60.0%
59.0%
61.0%
62.0%

60.0%
60.0%
60.0%
59.0%
61.0%
62.0%

60.0%
60.0%
60.0%
59.0%
61.0%
62.0%

60.0%
60.0%
60.0%
59.0%
61.0%
62.0%

60.0%
60.0%
60.0%
59.0%
61.0%
62.0%

60.0%
60.0%
60.0%
59.0%
61.0%
62.0%

SG&A (% sales)
Base
Management
Upside
Downside 1
Downside 2

1
2
3
4
5

25.0%
25.0%
25.0%
24.0%
26.0%
27.0%

25.0%
25.0%
25.0%
24.0%
25.0%
26.0%

25.0%
25.0%
25.0%
24.0%
25.0%
26.0%

25.0%
25.0%
25.0%
24.0%
25.0%
26.0%

25.0%
25.0%
25.0%
24.0%
25.0%
26.0%

25.0%
25.0%
25.0%
24.0%
25.0%
26.0%

25.0%
25.0%
25.0%
24.0%
25.0%
26.0%

25.0%
25.0%
25.0%
24.0%
25.0%
26.0%

25.0%
25.0%
25.0%
24.0%
25.0%
26.0%

25.0%
25.0%
25.0%
24.0%
25.0%
26.0%

Depreciation & Amortization (% sales)

Base
Management
Upside
Downside 1
Downside 2

1
2
3
4
5

2.0%
2.0%
2.0%
2.0%
2.0%
2.0%

2.0%
2.0%
2.0%
2.0%
2.0%
2.0%

2.0%
2.0%
2.0%
2.0%
2.0%
2.0%

2.0%
2.0%
2.0%
2.0%
2.0%
2.0%

2.0%
2.0%
2.0%
2.0%
2.0%
2.0%

2.0%
2.0%
2.0%
2.0%
2.0%
2.0%

2.0%
2.0%
2.0%
2.0%
2.0%
2.0%

2.0%
2.0%
2.0%
2.0%
2.0%
2.0%

2.0%
2.0%
2.0%
2.0%
2.0%
2.0%

2.0%
2.0%
2.0%
2.0%
2.0%
2.0%

Cash Flow Statement Assumptions

Capital Expenditures (% of sales)
Base
Management
Upside
Downside 1
Downside 2

1
2
3
4
5

2.0%
2.0%
2.0%
2.0%
2.5%
2.5%

2.0%
2.0%
2.0%
2.0%
2.5%
2.5%

2.0%
2.0%
2.0%
2.0%
2.5%
2.5%

2.0%
2.0%
2.0%
2.0%
2.5%
2.5%

2.0%
2.0%
2.0%
2.0%
2.5%
2.5%

2.0%
2.0%
2.0%
2.0%
2.5%
2.5%

2.0%
2.0%
2.0%
2.0%
2.5%
2.5%

2.0%
2.0%
2.0%
2.0%
2.5%
2.5%

2.0%
2.0%
2.0%
2.0%
2.5%
2.5%

2.0%
2.0%
2.0%
2.0%
2.5%
2.5%

Assumptions Page 2 - Balance Sheet

Year 1
2009

Year 2
2010

Year 3
2011

Year 4
2012

Projection Period
Year 5
Year 6
2013
2014

Year 7
2015

Year 8
2016

Year 9
2017

Year 10
2018

Current Assets
Days Sales Outstanding (DSO)
Base
Management
Upside
Downside 1
Downside 2

1
2
3
4
5

60.2
60.2
60.2
65.0
59.0
57.7

60.2
60.2
60.2
65.0
59.0
57.7

60.2
60.2
60.2
65.0
59.0
57.7

60.2
60.2
60.2
65.0
59.0
57.7

60.2
60.2
60.2
65.0
59.0
57.7

60.2
60.2
60.2
65.0
59.0
57.7

60.2
60.2
60.2
65.0
59.0
57.7

60.2
60.2
60.2
65.0
59.0
57.7

60.2
60.2
60.2
65.0
59.0
57.7

60.2
60.2
60.2
65.0
59.0
57.7

Days Inventory Held (DIH)

Base
Management
Upside
Downside 1
Downside 2

1
2
3
4
5

76.0
76.0
76.0
76.0
80.0
82.0

76.0
76.0
76.0
76.0
80.0
82.0

76.0
76.0
76.0
76.0
80.0
82.0

76.0
76.0
76.0
76.0
80.0
82.0

76.0
76.0
76.0
76.0
80.0
82.0

76.0
76.0
76.0
76.0
80.0
82.0

76.0
76.0
76.0
76.0
80.0
82.0

76.0
76.0
76.0
76.0
80.0
82.0

76.0
76.0
76.0
76.0
80.0
82.0

76.0
76.0
76.0
76.0
80.0
82.0

Prepaid and Other Current Assets (% of sales)

Base
1
Management
2
Upside
3
Downside 1
4
Downside 2
5

1.0%
1.0%
1.0%
1.0%
1.0%
1.0%

1.0%
1.0%
1.0%
1.0%
1.0%
1.0%

1.0%
1.0%
1.0%
1.0%
1.0%
1.0%

1.0%
1.0%
1.0%
1.0%
1.0%
1.0%

1.0%
1.0%
1.0%
1.0%
1.0%
1.0%

1.0%
1.0%
1.0%
1.0%
1.0%
1.0%

1.0%
1.0%
1.0%
1.0%
1.0%
1.0%

1.0%
1.0%
1.0%
1.0%
1.0%
1.0%

1.0%
1.0%
1.0%
1.0%
1.0%
1.0%

1.0%
1.0%
1.0%
1.0%
1.0%
1.0%

Current Liabilities
Days Payable Outstanding (DPO)
Base
Management
Upside
Downside 1
Downside 2

1
2
3
4
5

45.6
45.6
45.6
47.0
42.5
40.0

45.6
45.6
45.6
47.0
42.5
40.0

45.6
45.6
45.6
47.0
42.5
40.0

45.6
45.6
45.6
47.0
42.5
40.0

45.6
45.6
45.6
47.0
42.5
40.0

45.6
45.6
45.6
47.0
42.5
40.0

45.6
45.6
45.6
47.0
42.5
40.0

45.6
45.6
45.6
47.0
42.5
40.0

45.6
45.6
45.6
47.0
42.5
40.0

45.6
45.6
45.6
47.0
42.5
40.0

Accrued Liabilities (% of sales)

Base
Management
Upside
Downside 1
Downside 2

1
2
3
4
5

10.0%
10.0%
10.0%
10.0%
10.0%
10.0%

10.0%
10.0%
10.0%
10.0%
10.0%
10.0%

10.0%
10.0%
10.0%
10.0%
10.0%
10.0%

10.0%
10.0%
10.0%
10.0%
10.0%
10.0%

10.0%
10.0%
10.0%
10.0%
10.0%
10.0%

10.0%
10.0%
10.0%
10.0%
10.0%
10.0%

10.0%
10.0%
10.0%
10.0%
10.0%
10.0%

10.0%
10.0%
10.0%
10.0%
10.0%
10.0%

10.0%
10.0%
10.0%
10.0%
10.0%
10.0%

10.0%
10.0%
10.0%
10.0%
10.0%
10.0%

Other Current Liabilities (% of sales)

Base
Management
Upside
Downside 1
Downside 2

1
2
3
4
5

2.5%
2.5%
2.5%
2.5%
2.5%
2.5%

2.5%
2.5%
2.5%
2.5%
2.5%
2.5%

2.5%
2.5%
2.5%
2.5%
2.5%
2.5%

2.5%
2.5%
2.5%
2.5%
2.5%
2.5%

2.5%
2.5%
2.5%
2.5%
2.5%
2.5%

2.5%
2.5%
2.5%
2.5%
2.5%
2.5%

2.5%
2.5%
2.5%
2.5%
2.5%
2.5%

2.5%
2.5%
2.5%
2.5%
2.5%
2.5%

2.5%
2.5%
2.5%
2.5%
2.5%
2.5%

2.5%
2.5%
2.5%
2.5%
2.5%
2.5%

Copyright 2009 by Joshua Rosenbaum and Joshua Pearl. All rights reserved.
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Printed in the United States of America
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