Omega Processors, Inc., a relatively new high growing graphics chip manufacturer, has decided it needs to raise needed operational capital, expand into developing markets, fund their pension plan, and promote the name and profile of the firm. In response, after consultation with a prominent investment banking firm (Petronis Management, Inc.), the company decided to go public and list its shares on the Nasdaq under the symbol OPS. During the pre-IPO due diligence period, Petronis Management, Inc. hired you to do a top down analysis of itself to determine an appropriate market valuation and IPO selling price.

Petronis Management, Inc. is expanding its capital markets, investment banking, and mergers & acquisitions efforts and assigned you as lead consultant. You are tasked with the responsibility of clearly delineating a step-by-step valution process so OPS will understand the derivation of and factors contributing to its overall market valuation. The head of Investment Banking at Petronis Management, Inc. has directed you to develop an Excel spreadsheet as the primary format of your efforts so future consulting projects and easily be compared and replicated.

Being recently hired by Petronis Management, Inc. investment banking arm and desiring to make a positive impression, you have compiled an ordered list of calculated variables needed to derive an appropriate valuation-the list reads:

• Operating Cash Flow (OCF) annually first ten years and terminal phase
• Free Cash Flow (FCF) annually first ten years and terminal phase
• Asset Beta (Industry Beta) company will use in its analysis
• Discount rate: appropriate rate to use for derivation of firm valuation & stock price
• Asset value: present value FCFs first ten years and terminal phase
• Equity value: asset value net of debt
• Stock price: equity value of firm expressed on a per share basis
• Recommendations: IPO process, corporate structure and/or operations to improve OPS’s stock price

Sales:

With the assistance of a market research firm, sales (in units) are projected to come in at be 492,236 in the first year; grow by 8.52% for years 2 through 5; and increase its growth to 4.26% for years 6 through 10. Then decrease to 2.85% in the terminal period. Due to operational constraints and a philosophy of wanting to focus on graphics processors, OPS produces a single product: Electron e13 Processor Chip. Unit pricing of the chip is $329 in the current year and is projected to rise 4.57% years 2 through 5 and 2.25% for years 6 through 10.

Costs (Variable and Fixed):

Variable cost in the first year come in at $156/unit which is expected to grow 3.24% for years 2 through 5 and 4.92% for years 6 through 10.

Fixed costs start off in year one at $5,312,975 and follows the same time path as variable costs. Growth in fixed costs are anticipated to be 3.22% for years 2 through 5 and 3.87% for years 6 through 10.

OPS is contemplating structural changes to increase operating leverage, but no plans have currently been finalized.

Capital Expenditures & Depreciation:

Necessary capital expenditures at year 0 for OPS are expected to be $17,532,107 based on currently approved capital budgeting projects which reflect corporate strategy. OPS expects with high probability capital expenditures of $2,019,319 in FY1 and $1,129,472 in FY2 as necessary investments to support the infrastructure and growth of its flagship product-the Electron e13 Processor Chip.

According to IRS tax regulations, capital expenditures for the e13 Processor Chip project are required to be depreciated beginning in the year following the year of investment according to the 5-year MACRS schedule. In the terminal phase of growth, investment strategy is anticipated to change to that of a maintenance orientation in support of residual future marketing opportunities presently unknown to the company. As such, the average depreciation charge per year of $789,134 following a straight-line depreciation method is anticipated with an on-going 3-year time horizon strategy

Working Capital:

Working capital is projected to start at $0 in year 0, but require an investment approximating 12.257% of revenues each year through the end of year 5. Starting in year 6 the anticipated necessary investment in working capital is projected to fall to 6.37% of revenues which is expected to last through year 10.

Miscellaneous:

OPS’s applicable tax rate is the current marginal corporate income tax rate set forth in the IRS tax code. You are tasked with researching this tax rate.

Starting in the terminal phase, Free Cash Flow is expected to grow by the 1.75% indefinitely.

OPS’s debt/equity ratio is 0.45.

Total debt is $37,318,100 with maturity in FY8; but in year 6 (start of year), OPS plans to issue $258,913,500 of mortgage debt with a maturity of ten years to expand e13 Project capacity. OPS’s operational business risk structure requires the company to currently pay a 2.25% premium to the benchmark U.S. 10-year Treasury risk-free rate for longer term debt issuance. The company is conservatively estimating no change in its credit rating nor risk premium at the time of its anticipated debt offering.

The risk-free rate: U.S.10-year Treasury note yield on the date of your valuation which is expected to be 1.05%.

The expected market return (S&P 500) is the long-term realized rate of return on the S&P 500 index which is assumed to be 10.25%.

The median equity beta for the semiconductor industry to be used as a proxy for OPS’s equity beta; this is assumed to be 1.57

Upon OPS’s IPO, 21,750,000 shares of common stock will be issued, of which none will be held in lock-up by current management.

Answer rating: 100% (QA)

Particulars Sales units Unit Price Total Sales Variable Cost per unit Total Variable Cost Fixed Cost ... View the full answer