Holmes Truck Rental Company
Parameters
Annual Property Tax ($)	35,000.00
Maintenance ($/truck)	4,800.00
Truck Rental Growth Rate	0.09
Property Tax Growth Rate	0.04
Maintenance Growth Rate	0.07
Discount Rate	0.10
Current Firm Value ($)	1,000,000.00
End of Year Sales Price (xRevenue)	3.3
Fleet (Trucks)	50
Current Rental Price ($/truck/mo)	1,000.00
Trucks rented each month	0.60
Slope (%/$)	-0.0007
Y-intercept (% rented)	1.3
Number of years holding investment	3

Transcribed Image Text:

Consisting of 50 large trucks rented to industrial contractors, the Holmes Truck Rental Company is for sale for $1,000,000. Eric Holmes, the seller, has supplied the operating data below to assist potential buyers in evaluating the company. As a new analyst at a private-equity partnership, your job is to construct a brief, initial analysis to determine whether further investigation is warranted. Holmes pays property taxes of $35,000 per year and it costs $4,800 per truck per year to administer and maintain the fleet. The property taxes are expected to grow at a rate of 4% per year, and the maintenance costs are estimated to grow 7% per year. Each truck's rental rate (price) currently is $1000 per month. At this rental rate, on average 60% of the trucks are rented each month. Holmes believes that if he lowered the rent by $100 per truck per month, he would increase the average rental percentage by seven percentage points and that this increment would apply to each additional reduction in rental rate of $100. For example, at a $600 truck rental rate, 88% of the trucks would be rented each month. Whatever truck rental rate is set for the first year will be increased by 9% per year for years 2 and 3. The average percent of trucks rented in subsequent years will be the same as the value determined in the first year, regardless of the increased rental rate in those years. Your firm generally holds investments in small businesses for three years, and then attempts to sell them to "strategic" investors at a profit. Experience in the equipment rental sector suggests that a reasonable estimate of the selling price at the end of year three would be 3.3 times the revenue in year three. Consisting of 50 large trucks rented to industrial contractors, the Holmes Truck Rental Company is for sale for $1,000,000. Eric Holmes, the seller, has supplied the operating data below to assist potential buyers in evaluating the company. As a new analyst at a private-equity partnership, your job is to construct a brief, initial analysis to determine whether further investigation is warranted. Holmes pays property taxes of $35,000 per year and it costs $4,800 per truck per year to administer and maintain the fleet. The property taxes are expected to grow at a rate of 4% per year, and the maintenance costs are estimated to grow 7% per year. Each truck's rental rate (price) currently is $1000 per month. At this rental rate, on average 60% of the trucks are rented each month. Holmes believes that if he lowered the rent by $100 per truck per month, he would increase the average rental percentage by seven percentage points and that this increment would apply to each additional reduction in rental rate of $100. For example, at a $600 truck rental rate, 88% of the trucks would be rented each month. Whatever truck rental rate is set for the first year will be increased by 9% per year for years 2 and 3. The average percent of trucks rented in subsequent years will be the same as the value determined in the first year, regardless of the increased rental rate in those years. Your firm generally holds investments in small businesses for three years, and then attempts to sell them to "strategic" investors at a profit. Experience in the equipment rental sector suggests that a reasonable estimate of the selling price at the end of year three would be 3.3 times the revenue in year three.

Answer rating: 100% (QA)

To build an Excel model of the value of Holmes Truck Rental Company to a prospective buyer we need to calculate the annual cash flows for each of the ... View the full answer