You are an Investment Banker with the firm of Emerson, Lake and Palmer, LLC and you're working
Question:
You are an Investment Banker with the firm of Emerson, Lake and Palmer, LLC and you're working on a leveraged acquisition being considered by your client, Allison Chains, Inc. You've received financial information and projections from the target company and you begin the preparation of you DCF valuation model. You know that your Managing Director at Emerson, Lake and Palmer, LLC will want to present two general forms of analysis to the Allison Chains, Inc. board of directors.
- The first will be a valuation of the entire business enterprise based on a projection of Free Cash Flow.
- The second will be an IRR analysis of the specific investment returns in the form of Net Cash Flow that Allison Chains, Inc. will earn on the equity portion of their purchase of the target company.
| Year 1 |
Earnings before Interest, Taxes, Depr. and Amort. | $ 20,000 |
Amortization Expense | $ 0 |
Depreciation Expense | $ 3,700 |
Earnings Before Interest and Taxes | $ 16,300 |
Interest Expense | $ 2,500 |
Income Before taxes | $ 13,800 |
Provision for Taxes | $ 3,450 |
Net income | $ 10,425 |
|
|
Other data |
|
Dividends Paid | $ 0 |
Required Addition of New Working Capital | $ 1,000 |
Capital Expenditures | $ 4.000 |
Debt Principal Payments | $ 1,000 |
Based on the information set out above, complete the following:
- Make separate calculations of the Year 1 values of FCF and NCF that you'll use in your valuation and IRR modeling, respectively?
- Only regarding your FCF calculation for Year 1, assume a WACC rate of 14% and calculate the present value of the FCF that you've determined. In so doing, you recall that your Managing Director is a fan of a mid-year periodicity assumption?
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