1. Using Financial Statement Models for Valuation MGT 4850 Spring 2008 University of Lethbridge

2. Corporate Valuation Building Pro forma model Calculating the relevant free cash flows Calculating the cost of capital for the free cash flows Determining the terminal value of the firm Properly discounting the free cash flows Sensitivity analysis

3. Farmers Bagels Inc. Balance sheets and Income Statements for 1995 and 1996 (p.90) Ratio analysis (p. 91) Sales predictions (2001)→ terminal value

4. Model Assumptions Drop the distinction between product sales and other income Cost of goods sold -40% Selling, general and administrative expenses (-1%/y) Income tax rate 41.5% Cash cushion-declining proportion of sales Accounts receivable – 22% of sales

5. Model Assumptions II Inventory 5% of sales Property and equipment at cost 70% in ‘96 to 40% in 2001. Straight line deprec. at 10% of prop. Cost Accounts payable and accrued expenses +1%/y till 20% Income tax payable 25% Other curr. liabilities 1% of sales No dividends, no new equity (debt is the plug).

6. MODEL

7. INCOME STATEMENT

8. Balance Sheet

9. Negative Debt If total value of minimum cash balance plus all other assets is greater than current liabilities the company needs debt. [Cash ratio]*Sales+Acc. Rec. + Inventory + Prepaid exp. + Net property and equipm. – Curr. Liab. – Com. Stock – Ret. Earn. < 0 then debt is set at 0 p.94 pro forma model

10. Deriving the FCF (p.90) Positive profit, negative cashflows

11. Projected FCF 1999 first positive cash flow (p.97)

12. Proposition one

14. Agency costs

15. As

16. WACC WACC= E/(E+D)*r e + D/(E+D)* r D (1-T c ) CAPM based averages for the industry

17. Industry Average WACC 20.43% and terminal value

18. Sensitivity Analysis Value as a function of WACC (row) and terminal growth rate (column)

19. Sensitivity Analysis Share price is calculated as a unction of two variables

20. Terminal Value Proxies