# ValuationProblems

```The following are extracted from the financial statements of Frem, Inc., for 2006, 2005, and 2004.
2006
Net sales
Cost of sales
Other income (expense):
Interest
Other
Earnings before tax and extraordinary credit
Provision for income tax
Earnings before extraordinary credit
Extraordinary credit
Total assets
Current liabilities
Long-term debt
Total liabilities
Common equity
Preferred stock
Total equity
Total liabilities and equity
2005
\$233,000
(124,000)
(95,000)
\$204,000
(110,000)
(81,500)
(3,700)
100
\$ 10,400
(4,800)
5,600
—
\$ 5,600
(3,050)
1,175
\$ 10,625
(4,740)
5,885
1,510
\$ 7,395
\$202,000
50,400
24,600
75,000
123,000
4,000
127,000
\$202,000
\$173,000
34,800
17,400
52,200
116,800
4,000
120,800
\$173,000
2004
\$161,000
29,000
15,200
44,200
112,800
4,000
116,800
\$161,000
What is book value in 2006? In 2005? In 2004?
2006
2005
2004
Total Asset
\$202000
\$173000
\$161000
Total Liabilities
\$75000
\$52200
\$44200
Book Value
\$127000
\$120800
\$116800
Assume depreciation and amortization expense of \$11,000 in 2006 and \$7,000 in 2005. What is
EBITDA for 2006? For 2005? Ignore the extraordinary credit in your calculations.
2006
2005
EBT
\$10400
\$10625
Interest
\$3700
\$3050
EBIT
14100
13675
Depreciation &amp; Amortization
11000
7000
EBITDA
25100
20675
EBITDA Margin = EBITDA / Total revenue
What multiple of EBITDA do you believe is suitable to value this business, and why?
EBITDA Margin 2006
\$25100
/
23300
= .1077 or 10.77
EBITDA Margin 2005
\$20675
/
204000
=.1013 or 10.13
What would you determine the value of this business to be at the end of 2006? 2005?
2006 : 10.77 x \$25100 = \$270,327
2005: 10.13 x \$20674 = \$209,428
Financial statements of Woodstock Manufacturing Company appear below (note amounts in thousands):
Balance Sheet
April 30
(in thousands of dollars)
2006
Assets:
Current assets
Plant and equipment (net)
Other assets
Total assets
Liabilities and Stockholders' Equity:
Current liabilities
Long-term liabilities
Capital stock (\$10 par)
Paid-in capital in excess of par
Retained earnings
Total liabilities and stockholders' equity
Net sales
Cost of sales
Gross profit
Selling expenses
Total operating expenses
Operating income
Interest expense
Net income before tax
Income taxes
Net income
2005
2004
\$ 1,700
8,110
1,004
\$10,814
\$1,120
7,830
695
\$9,645
\$1,544
5,404
772
\$7,720
\$
\$
\$
950
2,023
4,600
770
2,471
\$10,814
880
1,591
4,600
770
1,804
\$9,645
772
1,544
3,000
386
2,018
\$7,720
Income Statement
For the Year Ended April 30
(in thousands of dollars)
2006
2005
2004
\$38,610
25,100
\$13,510
7,700
4,270
\$11,970
\$ 1,540
115
\$ 1,425
655
\$
770
\$32,175
19,950
\$12,225
6,565
4,175
\$10,740
\$ 1,485
95
\$ 1,390
645
\$
745
\$25,740
15,400
\$10,340
5,148
3,861
\$9,009
\$1,331
100
\$1,231
541
\$ 690
What is book value in 2006? In 2005? In 2004? Note that numbers in financial statements are in
thousands.
2006
2005
2004
Total Asset
\$10,814
\$9,645
\$7,720
Total Liabilities
\$2,973
\$2,471
\$2,316
Book Value
\$7,841
\$7,174
\$5,404
Assume depreciation and amortization expense of \$811,000 in 2006 and \$783,000 in 2005. What is
EBITDA for 2006? For 2005?
2006
2005
EBT
\$1,425,000
\$1,390,000
Interest
\$115,000
\$95,000
EBIT
\$1,540,000
\$1,485,000
Depreciation &amp; Amortization
\$811,000
\$783,000
EBITDA
\$2,351,000
\$2,268,000
What multiple of EBITDA do you believe is suitable to value this business, and why?
EBITDA Margin 2006
EBITDA Margin 2005
\$2,351,000
\$2,268,000
/
\$38,610,000 =.0609 or 6.09
/
=.0705 or 7.05
32,175,000
What would you determine the value of this business to be at the end of 2006? 2005?
2005: \$2,351,000 x 6.09 = \$14,317,590
2006: \$2,268,000 x 7.05 = \$15,989,400
The following information is computed from Fast Food Chain’s annual report for 2006.
2006
2005
Current assets
Property and equipment, net
Intangible assets, at cost
less applicable amortization
\$ 2,731,020
10,960,286
\$ 2,364,916
8,516,833
294,775
\$13,986,081
255,919
\$11,137,668
Current liabilities
Deferred federal income taxes
Mortgage note payable
Stockholders' equity
\$ 3,168,123
160,000
456,000
10,201,958
\$13,986,081
\$ 2,210,735
26,000
—
8,900,933
\$11,137,668
Net sales
Cost of goods sold
Interest expense
Income tax expense
Net income
\$33,410,599
\$25,804,285
(30,168,715) (23,159,745
(2,000,000)
(1,500,000)
(216,936)
(39,456)
(400,000)
(300,000)
\$
624,948
\$
805,084
What is book value in 2006? In 2005?
2006
2005
Total Asset
\$13,986,081
\$11,137,668
Total Liabilities
\$3,784,123
\$2,236,735
Book Value
\$10,201,958
\$8,900,933
Assume depreciation and amortization expense of \$1,096,029 in 2006 and \$851,683 in 2005. What is
EBITDA for 2006? For 2005?
2006
2005
Net Income
\$624948
\$805084
Taxes
\$400,000
\$300000
Interest
\$216,936
\$39456
Depreciation &amp; Amortization
\$1,096,029
\$851,683
EBITDA
\$2337913
\$1996223
What multiple of EBITDA do you believe is suitable to value this business, and why?
Multiple = Enterprise Value / EBITDA
Enterprise Value = Total value of Asset excluding cash
2006
2005
Multiple
Enterprise Value
\$13986081
\$11137668
5.98
EBITDA
\$2337913
\$1996223
5.58
What would you determine the value of this business to be at the end of 2006? 2005?
2006: 5.98 x 2337913 = \$13,980,718
2005: 5.58 x 1996223 = \$11,138,924
2006
2005
\$13,980,718
\$11,138,924
Less: Deferred Tax
\$160000
\$2600
Mortgage Note
\$456000
\$13,370,081
\$11,111,668
The following financial information is excerpted from the 2006 annual report of Retail Products, Inc.
(note amounts in thousands)
Balance Sheet
(in thousands)
2006
2005
Current assets
Investments
Deferred charges
Property, plant, and equipment, net
Excess of cost over fair market
value of net assets acquired
Assets held for disposal
\$
Total liabilities
Total stockholders' equity
Income Statement
Net sales
Cost of goods sold
Interest expense
Net income (loss)
What is book value at the end of 2006 and 2005?
Book Value
449,195
32,822
4,905
350,921
45,031
\$
433,049
55,072
12,769
403,128
47,004
272,146
276,639
6,062
\$ 1,161,082
10,247
\$1,237,908
\$
689,535
471,547
\$ 1,161,082
\$
\$ 2,020,526
(2,018,436)
(300,000)
(40,000)
\$ (337,910)
\$1,841,738
(1,787,126)
(250,000)
(30,000)
\$ (225,388)
2006
2005
\$471,547
\$516759
721,149
516,759
\$1,237,908
Assume depreciation expense of \$40,000,000 in both 2006 and 2005, what is EBITDA for 2006? For
2005?
2006
2005
Net Loss
\$ (337910)
\$ (225388)
(+) Interest
\$40,000
\$30,000
(+) Depreciation
\$40,000,000
\$40,000,000
EBITDA
\$39,702,090
\$39,804,612
How would you value this company?
2006: 4.5 x \$39702090 = \$178,659,405
```