During 2020, an article was printed in the Toronto Star that stated that the CEO of...

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During 2020, an article was printed in the Toronto Star that stated that the CEO of TBI had been accused of a sexual harassment incident by an employee, in 2015, when he was the CEO of another company. The charges were subsequently dropped by the victim, and the CEO was not charged. However, the suspicious circumstances surrounding the situation and the negative press that ensued, resulted in the TBI board's decision to fire the CEO. He was paid $5,400,000 in severance in 2020 (included in administrative expenses). A new CEO was hired, immediately thereafter. Also, during 2020, TBI incurred an incremental income tax of $6,540,000 relating to an aggressive tax plan by TBI in 2016-2018. TBI's normal effective tax rate is the same as the past. As of the current date, February 2, 2021, TBI's stock price is $ 20 per share. The financial statements for TBI's December 31, 20 20 and 2019 fiscal years are attached. You gather the following facts regarding TBI: - On January 2, 2020, TBI issued shares, valued at $5,697,000 and incurred $850,000 in share issue costs, which were reported in selling, general and administrative expenses in 2020. The proceeds of the share issuance were used to open stores in 2020. The CEO and founder of TBI owns 35% of the outstanding shares of TBI. She is so passionate of the business and its future. she receives a salary of $1 per year. Most CEO's of public companies of this size receive salaries and bonuses of $5,000,000 per year. The only thing she asks, is that TBI pay for her estate in Tuscany, Italy. TBI paid $2,500,000, $4,000,000 and $500,000 in 2020, 2019 and 2018, respectively. Several store leases were signed 5 years ago. At that time the landlords (friends of the CEO/Founder of TBI) offered very favourable rental rates to allow TBI to grow and prosper. These leases will need to be renewed next year, at the fair market value rates. This will increase annual rental expenses by $4,000,000 per year. The business has minimal seasonality. Its net working capital accounts have remained stable in relative terms. The business is expected to have a long-term growth rate of 5%. To support the growth rate of 5%, TBI will have annual capital expenditures required in order to sustain operations of $6,000,000, which is significantly lower then prior years. Based on an analysis of the company's operations and growth prospects, as well as the industry dynamics and prevailing economic and credit market conditions, TBI's weighted average cost of capital is 20%. Required: You have been asked to calculate the Enterprise Value and Equity Value of TBI as at December 31, 2020, using the capitalized cash flows approach (20 marks) During 2020, an article was printed in the Toronto Star that stated that the CEO of TBI had been accused of a sexual harassment incident by an employee, in 2015, when he was the CEO of another company. The charges were subsequently dropped by the victim, and the CEO was not charged. However, the suspicious circumstances surrounding the situation and the negative press that ensued, resulted in the TBI board's decision to fire the CEO. He was paid $5,400,000 in severance in 2020 (included in administrative expenses). A new CEO was hired, immediately thereafter. Also, during 2020, TBI incurred an incremental income tax of $6,540,000 relating to an aggressive tax plan by TBI in 2016-2018. TBI's normal effective tax rate is the same as the past. As of the current date, February 2, 2021, TBI's stock price is $ 20 per share. The financial statements for TBI's December 31, 20 20 and 2019 fiscal years are attached. You gather the following facts regarding TBI: - On January 2, 2020, TBI issued shares, valued at $5,697,000 and incurred $850,000 in share issue costs, which were reported in selling, general and administrative expenses in 2020. The proceeds of the share issuance were used to open stores in 2020. The CEO and founder of TBI owns 35% of the outstanding shares of TBI. She is so passionate of the business and its future. she receives a salary of $1 per year. Most CEO's of public companies of this size receive salaries and bonuses of $5,000,000 per year. The only thing she asks, is that TBI pay for her estate in Tuscany, Italy. TBI paid $2,500,000, $4,000,000 and $500,000 in 2020, 2019 and 2018, respectively. Several store leases were signed 5 years ago. At that time the landlords (friends of the CEO/Founder of TBI) offered very favourable rental rates to allow TBI to grow and prosper. These leases will need to be renewed next year, at the fair market value rates. This will increase annual rental expenses by $4,000,000 per year. The business has minimal seasonality. Its net working capital accounts have remained stable in relative terms. The business is expected to have a long-term growth rate of 5%. To support the growth rate of 5%, TBI will have annual capital expenditures required in order to sustain operations of $6,000,000, which is significantly lower then prior years. Based on an analysis of the company's operations and growth prospects, as well as the industry dynamics and prevailing economic and credit market conditions, TBI's weighted average cost of capital is 20%. Required: You have been asked to calculate the Enterprise Value and Equity Value of TBI as at December 31, 2020, using the capitalized cash flows approach (20 marks)

Answer rating: 100% (QA)

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