ValExpress is interested in acquiring PrivCo, whose owner desires to retire. The firm is 100% owned by the current owner. PrivCo has revenues of $10 million and EBIT of $2 million. The value of the firm's debt is $5 million; the book value of equity is $4 million. For publicly traded firms in the same industry, the average market value of debt-to-equity ratio is 0.40; the marginal tax rate is 40%. Typically, the ratio of the market value of equity to book value of equity for these firms is 2. The average beta of publicly traded firms that are in the same business is 2. Capital expenditures and depreciation amount to $0.3 million and $0.2 million respectively. Both items are expected to grow at the same rate as revenues for the next 5 years and they are offsetting thereafter (i.e., capital spending will then be internally funded). As a result of excellent working capital management, the change in working capital is expected to be essentially zero throughout the forecast period and beyond. The revenues (and net income) of the firm are expected to grow to 15% annually for the next 3 years, 10% annually for the next two years (transition period), and 5% per year thereafter. The beta of the firm is expected to drop by 0.21 in the transition and by a further 0.29 in the stable period. The 10-year government bond rate, which is considered to be appropriate for valuing this firm, is 6%. The pre-tax cost of debt for a similar non-rated firm is 10% and the firm's tax rate is 40%. The market risk premium is 5.5%. No adjustment is made in the calculation of cost of equity for a marketability discount.

i. Estimate the shareholders' value in the firm.

ii) How much will the firm be worth five years from today?

iii) An investor desiring to purchase a minority interest of 20% equity in this private firm wants to apply a marketability discount of 15% and a minority discount of 15% to the offer price. How much will the investor pay for a 20% stake in the firm?

iv) What are marketability and minority risks and why is it important to adjust projected cash flows (value) of private firms for these risks? Briefly describe the two ways of accounting for marketability and minority risks.

Answer rating: 100% (QA)

i Shareholders Value To calculate the shareholders value we need to estimate the firms equity value and subtract the debt Equity Value Using the EVEBITDA multiple we can estimate the equity value EVEB... View the full answer