Berk/DeMarzo, Corporate Finance

Chapter 19 Tables and Examples

This workbook contains tables and examples from Chapter 19. Input formulas in the
INSTRUCTIONS shaded areas to recreate the tables in the book, and substitute your own values for the
bold blue numbers to see how the tables change.

TABLE 19.1
Estimated 2005 Income Statement and Balance Sheet Data for Ideko Corporation
SPREADSHEET

Year 2005 Year 2005

Income Statement ($000s) Balance Sheet ($000s) Additional Data
1 Sales 75,000 Assets
2 Cost of Goods Sold 1 Cash and Equivalents 12,664 6,500 Excess Cash
3 Raw Materials (16,000) 2 Accounts Receivable 18,493
4 Direct Labor Costs (18,000) 3 Inventories 6,165 1,973 Raw Materials
5 Gross Profit 41,000 4 Total Current Assets 37,322
6 Sales and Marketing (11,250) 5 Property, Plant, and Equipment 49,500
7 Administrative (13,500) 6 Goodwill -
8 EBITDA 16,250 7 Total Assets 86,822
9 Depreciation (5,500) Liabilities and Stockholders' Equity
10 EBIT 10,750 8 Accounts Payable 4,654 1,294 Wages Due
11 Interest Expense (net) (75) 9 Debt 4,500
12 Pretax Income 10,675 10 Total Liabilities 9,154
13 Income Tax (3,736) 11 Stockholders' Equity 77,668
14 Net Income 6,939 12 Total Liabilities and Equity 86,822

TABLE 19.3
Ideko Sales and Operating Cost Assumptions
SPREADSHEET

Year 2005 2006 2007 2008 2009 2010

Sales Data Growth/Year
1 Market Size (000 units) 5.0% 10,000 10,500 11,025 11,576 12,155 12,763
2 Market Share 1.0% 10.0% 11.0% 12.0% 13.0% 14.0% 15.0%
3 Aveage Sales Price ($/unit) 2.0% 75.00 76.50 78.03 79.59 81.18 82.81
Cost of Goods Data
4 Raw Materials ($/unit) 1.0% 16.00 16.16 16.32 16.48 16.65 16.82
5 Direct Labor Costs ($/unit) 4.0% 18.00 18.72 19.47 20.25 21.06 21.90
Operating Expense and Tax Data
6 Sales and Marketing (% sales) 15.0% 16.5% 18.0% 19.5% 20.0% 20.0%
7 Administrative (% sales) 18.0% 15.0% 15.0% 14.0% 13.0% 13.0%
8 Tax Rate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%

EXAMPLE 19.2 Production Capacity Requirements

Year 2005 2006 2007 2008 2009 2010

Production Volume (000 units)
1 Market Size 10,000 10,500 11,025 11,576 12,155 12,763
2 Market Share 10.0% 11.0% 12.0% 13.0% 14.0% 15.0%
3 Production Volume (1x2) 1,000 1,155 1,323 1,505 1,702 1,914

TABLE 19.4
Ideko Capital Expenditure Assumptions
SPREADSHEET

Year 2005 2006 2007 2008 2009 2010

Fixed Assets and Capital Investment ($000s)
1 Opening Book Value 50,000 49,500 49,050 48,645 61,781 69,102
2 Capital Investment 5,000 5,000 5,000 20,000 15,000 8,000
3 Depreciation (5,500) (5,450) (5,405) (6,865) (7,678) (7,710)
4 Closing Book Value 49,500 49,050 48,645 61,781 69,102 69,392

TABLE 19.5
Ideko's Planned Debt and Interest Payments
SPREADSHEET

Year 2005 2006 2007 2008 2009 2010

Debt and Interest Table ($000s)
1 Outstanding Debt 100,000 100,000 100,000 115,000 120,000 120,000
2 Interest on Term Loan 6.80%

TABLE 19.6
Sources and Uses of Funds for the Ideko Acquisition
SPREADSHEET

Acquistion Financing ($000s)

Sources Uses
1 New Term Loan Purchase Ideko Equity 150,000
2 Excess Ideko Cash Repay Existing Ideko Debt
3 KKP Equity Investment Advisory and Other Fees 5,000
4 Total Sources of Funds 155,000 Total Uses of Funds 155,000

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 Berk/DeMarzo, Corporate Finance
Chapter 19 Tables and Examples

TABLE 19.7
Pro Forma Income Statement for Ideko, 2005–2010
SPREADSHEET

Year 2005 2006 2007 2008 2009 2010

Income Statement ($000s)
1 Sales 75,000
2 Cost of Goods Sold
3 Raw Materials (16,000)
4 Direct Labor Costs (18,000)
5 Gross Profit 41,000 - - - - -
6 Sales and Marketing (11,250)
7 Administrative (13,500)
8 EBITDA 16,250 - - - - -
9 Depreciation (5,500)
10 EBIT 10,750 - - - - -
11 Interest Expense (net) (75)
12 Pretax Income 10,675 - - - - -
13 Income Tax (3,736)
14 Net Income 6,939 - - - - -

TABLE 19.8
Ideko's Working Capital Requirements
SPREADSHEET

Year 2005 >2005

Working Capital Days
Assets Based On: Days Days
1 Accounts Receivable Sales Revenue 90 60
2 Raw Materials Raw Materials Costs 45 30
3 Finished Goods Raw Materials + Labor Costs 45 45
4 Minimum Cash Balance Sales Revenue 30 30
Liabilities
5 Wages Payable Direct Labor + Admin Costs 15 15
6 Other Accounts Payable Raw Materials + Sales & Marketing 45 45

TABLE 19.9
Ideko's Net Working Capital Forecast
SPREADSHEET

Year 2005 2006 2007 2008 2009 2010

Working Capital ($000s)
Assets
1 Accounts Receivable 18,493
2 Raw Materials 1,973
3 Finished Goods 4,192
4 Minimum Cash Balance 6,164
5 Total Current Assets 30,822 - - - - -
Liabilities
6 Wages Payable 1,294
7 Other Accounts Payable 3,360
8 Total Current Liabilities 4,654 - - - - -
Net Working Capital
9 Net Working Capital (5 - 8) 26,168
10 Increase in Net Working Capital

TABLE 19.10
Ideko's Free Cash Flow Forecast
SPREADSHEET

Year 2005 2006 2007 2008 2009 2010

Free Cash Flow ($000s)
1 Net Income
2 Plus: After-Tax Interest Expense
3 Unlevered Net Income - - - - -
4 Plus: Depreciation
5 Less: Increases in NWC
6 Less: Capital Expenditures
7 Free Cash Flow of Firm - - - - -
8 Plus: Net Borrowing
9 Less: After-Tax Interest Expense
10 Free Cash Flow to Equity - - - - -

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 Berk/DeMarzo, Corporate Finance
Chapter 19 Tables and Examples

TABLE 19.11
Pro Forma Balance Sheet for Ideko, 2005–2010
SPREADSHEET

Goodwill Calculation ($000s)

Total Purchase Price
Comprised of:
Book Value of Equity
Goodwill

Year 2005 2006 2007 2008 2009 2010

Balance Sheet ($000s)
Assets
1 Cash and Cash Equivalents
2 Accounts Receivable 18,493
3 Inventories 6,165
4 Total Current Assets 24,658 - - - - -
5 Property, Plant, and Equipment 49,500 49,050 48,645 61,781 69,102 69,392
6 Goodwill
7 Total Assets 74,158 49,050 48,645 61,781 69,102 69,392
Liabilities
8 Accounts Payable 4,654
9 Debt
10 Total Liabilities 4,654 - - - - -
Stockholders' Equity
11 Starting Stockholders' Equity
12 Net Income
13 Dividends -
14 Capital Contributions 150,000
15 Stockholders' Equity 150,000 - - - - -
16 Total Liabilities and Equity 154,654 - - - - -

TABLE 19.12
Pro Forma Statement of Cash Flows for Ideko, 2005–2010
SPREADSHEET

Year 2005 2006 2007 2008 2009 2010

Statement of Cash Flows ($000s)
1 Net Income
2 Depreciation
3 Changes in Working Capital
4 Accounts Receivable
5 Inventory
6 Accounts Payable
7 Cash from Operating Activities - - - - -
8 Capital Expenditures
9 Other Investment - - - - -
10 Cash from Investing Activities - - - - -
11 Net Borrowing
12 Dividends
13 Capital Contributions
14 Cash from Financing Activities - - - - -

15 Change in Cash (7+10+14) - - - - -

COST OF CAPITAL

Unlevered Cost of Capital 10.00%

Cost of Debt 6.80%

TABLE 19.15 Continuation Value Estimate for Ideko

SPREADSHEET

TABLE 19.16 Discounted Cash Flow Estimate of Continuation Value, with Implied
SPREADSHEET EBITDA Multiple

Continuation Value: Multiples Approach ($000s)

1 EBITDA in 2010 Common Multiples
2 EBITDA multiple 9.1x EV/Sales
3 Continuation Enterprise Value P/E (levered)
4 Debt P/E (unlevered)
5 Continuation Equity Value -

Continuation Value: DCF and EBITDA Multiple ($000s)

1 Long-Term Growth Rate 5.34%
2 Target D/(E+D) 40.0%
3 Projected WACC
Free Cash Flow in 2011
4 Unlevered Net Income Continuation Enterprise Value
5 Less: Increase in NWC
6 Less: Increase in Fixed Assets Implied EBITDA Multiple

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 Berk/DeMarzo, Corporate Finance
Chapter 19 Tables and Examples

7 Free Cash Flow -

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 Berk/DeMarzo, Corporate Finance
Chapter 19 Tables and Examples

TABLE 19.17
APV Estimate of Ideko's Initial Equity Value
SPREADSHEET

Year 2005 2006 2007 2008 2009 2010

APV Method ($000s)
1 Free Cash Flow
2 Unlevered Value Vu
3 Interest Tax Shield
4 Tax Shield Value Ts
5 APV: VL = Vu + Ts - - - - - -
6 Debt
7 Equity Value - - - - - -

TABLE 19.19
IRR and Cash Multiple for KKP's Investment in Ideko
SPREADSHEET

Year 2005 2006 2007 2008 2009 2010

IRR and Cash Multiple
1 Initial Investment
2 Free Cash Flow to Equity
3 Continuation Equity Value
4 KKP Cash Flows - - - - - -
5 IRR
6 Cash Multiple

TABLE 19.20
Sensitivity Analysis for KKP's Investment in Ideko
SPREADSHEET

Current Row input data table.

Exit EBITDA Multiple 6.0 7.0 8.0 9.1 10.0 11.0

Implied Long-Run Growth Rate
Ideko Enterprise Value ($ million)
KKP Equity Value ($ million)
KKP IRR

Row input data table.

Current
Unlevered Cost of Capital 9.0% 10.0% 11.0% 12.0% 13.0% 14.0%
Implied Long-Run Growth Rate
Ideko Enterprise Value ($ million)
KKP Equity Value ($ million)

Example of a 2-variable data table

Unlevered Cost of Capital versus Exit EBITDA Multiple >> KKP Equity Value ($ million) Row and column input data table.
Exit EBITDA Multiple
KKP Equity Value 7.0 8.0 9.1 10.0 11.0
Cost of Capital ru 9.0%
9.5%
10.0%
10.5%
11.0%

EXAMPLE 19.4 Leverage and Free Cash Flow

Year 2005 2006 2007 2008 2009 2010

Free Cash Flow ($000s)
1 Free Cash Flow of Firm
2 Plus: Net Borrowing
3 Less: After-Tax Interest Expense
4 Free Cash Flow to Equity - - - - -

TABLE 19A.1 FTE Estimate of the Cost of Management's Share and KKP's
SPREADSHEET Equity Value

Year 2005 2006 2007 2008 2009 2010

Management/KKP Share ($000s)
1 Management Payoff (10% share)
2 Effective Leverage (D-Ts)/E
3 Equity Cost of Capital rE
4 Cost of Management's Share -
5 Ideko Equity Value
6 KKP Equity Value - - - - - -