Commercial Fixtures Inc. + Business valuation overview
Suggested questions for the Commercial Fixtures Inc. case are given below.
1. What would you as an outside third party bid under the same conditions (with the same information) for the entire company (both halves)? Why?
2. What do you expect Albert Evans to bid for Gordon’s half interest? Why?
3. What should Gordon Whitlock bid for Albert’s half interest? Why?
4. How would you structure the purchase of the business?
Question #1 is a business valuation question. There are a number of ways to estimate the value of a business. You have probably covered one or more of these ways in a previous class. ...view middle of the document...
Estimate the first 3 to 10 years’ free cash flows and calculate the PVs. (A five year horizon is common, but this can vary.) Typically you will use the WACC as your discount rate. Depending on the circumstances, the estimated cash flows may be available for fewer than five years, or more than five years.
b. Estimate the PV of the terminal value. One estimate for the terminal value involves assuming perpetual cash flows after the initial time horizon, e.g.:
i. If the cash flow after 5 years is expected to grow at a rate g for the foreseeable future: Terminal Value5 (TV5) = FCF6 /(k – g) = FCF5 (1+ g) / (k – g)., where k is the required rate of return. You must discount the TV to time 0, and then add this to the PV of the FCFs during the projection horizon.
ii. If the cash flow at the end of 5 years is not expected to grow, i.e., g=0, then the general formula collapses to the PV of a no-growth perpetuity: Terminal Value5 = FCF6 / (k-g) = FCF5 (1+ g)/(k – g) = FCF5 / k
c. Use the Value of the Firm equation above, i.e. sum PV of free cash flows + PV of terminal value . The Value of the firm’s Equity = Value of the Firm – Debt Currently Outstanding.