A company has earned $1,000,000 in revenue this year. The expenses (including taxes) are roughly $750,000 a year. This means that after taxes the company has earned $250,000 in profit this year. Your private equity firm is extremely interested in purchasing this company and wants to make an offer. 

Review the details and assumptions and answer both below: Given the following assumptions: Assume that expenses have increased steadily at approximately 3% each year since the business opened five years ago. Assume that revenue is expected to grow at 15% for the next three years and then level off at a fairly consistent long-term growth rate of 4%.

Using a two-stage model (forecast and terminal value) calculate the following: 

What should your private equity firm be prepared to offer the company if your current investment portfolio has earned 18% over the past twelve years? 

If your investment returns have been 12% over the past several years, what is the new offer price?

Answer rating: 100% (QA)

To calculate the value of the company we need to use a discounted cash flow DCF analysis based on the assumptions given The DCF analysis involves forecasting future cash flows discounting them to thei... View the full answer