You are trying to value a private firm, Acme Inc., to figure out how much money it can expect to raise in an IPO.  Acme Inc. manufactures pool equipment.  In the current year, Acme has sales of $1M and the free cash flow of $0.5M. 

You identified two publicly traded firms, Firm A and Firm B, with very similar business models, on which you will base your valuation. 

You looked up the following information, for the current year, for these comparable firms: 

Comparable Firm values (in $M)	Firm A	Firm B	ACME
Value of equity:	100	500
Value of debt	30	10
Equity beta	1.7	1.2
Debt beta	0.25	0.25
Sales	10	55	1.0
Free Cash Flow	6	30	0.5
Sales and Cash flow growth rate (g)			3%
r_f	2%
r_M- r_f	5%

 

 

1. What is Acme's valuation implied by the sales multiple of comparable firms?

1. What is Acme's valuation implied by the cash flow multiple of comparable firms? 

1. You expect that Acme's sales and cash flows will grow in perpetuity at the annual growth rate of 3%.   Furthermore, you observe that the risk-free rate is 2%.  You estimate that the expected market risk premium is 5%. Assume that the beta of debt is 0.25 for all firms.  What is the Discounted Cash Flow valuation of Acme? (HINT: Use the Gordon Growth Formula. For discount rates for ACME, use the CAMP model with ACME beta being the average asset beta of firm A and B, which can be calculated as Beta(asset) = E/(D+E) *beta(equity) + D/(D+E) *beta(debt), where D and E are debt and equity value)