ACCT/FIN 4337 – Business Valuation Team Valuation Project Guidelines
The ACCT/FIN 4337 team valuation project for this semester is describe below. It tracks the overall content of the course that will be discussed in class. You will become familiar with the material through exercises, homework, and usage in this project, and it will be the subject of examinations.
For the project, you will be assigned to teams of four or five students each, and your goal will be to determine the equity value of Atrion Corporation. Although it is publicly traded (NASDAQ: ATRI), you will value company as if privately held. This company was chosen because its information is readily available. Your conclusion will be that the value is a stated amount or falls in stated range of values. You will not determine if its actual market value is understated or overstated. Your conclusion must be independent of the quoted market value. View this company as if you are evaluating it as an acquisition of 100% of the common stock outstanding, not as the price of one share of stock. You are to consider this company as if you were making a long-term investment by buying the whole company, not a block of its stock. Each team will be given an overall grade based on items A. and B. below, and each team member will receive the overall grade as adjusted for item C., which includes the team members peer evaluations of their contribution and teamwork for the project and the case. These components will be allocated as follows:
A. Organization, grammar, and attention to detail 40% B. Analytical quality with emphasis on rationale
for assumptions and other decisions 40% C. Presentation skills and peer review 20%
_____ Total 100% A peer review form will be provided in a separate document in eLearning and will be due on the same date as the team paper. Planning period length and rate of growth You are to determine whether this company will grow initially at a rate of growth different from its perpetual rate of growth. If so, select a rate of growth for planning periods or a period of
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time during which this company would be expected to grow at a rate higher than the perpetual growth rate or the overall rate of growth rate of the economy. For example, a target company might be expected to grow at 7% for 5 years and at the rate of growth of the overall economy or its industry thereafter. This rate of growth should be determined based on your research into the overall economy and political climate, this industry, stock research analysts projections, and investments the company is making in capital goods and working capital for the future. Perpetual growth phase You are to select a rate of growth in perpetuity, which could be equal to, more than, or less than the growth rate of the economy or even zero or negative. This rate should be based on your research of the U.S. economy and the companys particular industry sector Financial statement forecast Forecast a balance sheet and a statement of income for the planning periods described above, based on a study of the historical financial statements of the company, your research described above, and the forecasting techniques we will learn this semester. Free cash flow forecast Forecast the cash flow as Free Cash Flow to the Firm, meaning the cash flow to all components of the capital structure. Use this formula: EBIT (Earnings Before Interest and Taxes) – Tax (EBIT x Marginal tax Rate) _____________________________________________
= NOPAT (Net Operating Income After Tax) + Depreciation – CAPEX (Capital Expenditures) – Increases in NWC (Increase in Net Working Capital) * _____________________________________________ = FCFF (Free cash flow to the firm) * Net Working Capital will exclude both non-operating cash and interest-bearing debt.
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Select a discount rate using a weighted average cost of capital (WACC) based on weights and costs of elements of the capital structure. Determine capital structure weights using values of components of the capital structure.
Interest bearing debt classified as a current liability. Unless circumstances would indicate otherwise, use book value and stated interest rate less tax effect. [Rate x (1-T)].
Long-term debt. Create a synthetic market yield-to-maturity by calculating an interest coverage ratio (EBIT/Interest expense) and referring to the Damodaran Ratings, Interest Coverage Ratio, and Default Spreads table to obtain a default spread to add to the comparable Treasury Rate. Give effect to taxes. [Rate x (1-T)]. Use the synthetic market yield-to-maturity to determine market value for market structure weights.
Preferred stock. – If publically traded, use market value and determine cost using Div/Price. – If not publically traded, and not significant to capital structure, use book value and
dividend rate. If significant, then attempt to create a synthetic market value and cost by comparing to similar issues that trade more frequently.
Common stock. Use current market capitalization as an estimate. Determine cost using the Capital Asset Pricing Model (CAPM) [R(F) + b(Mkt Risk Premium)]. Use the current 10-Year Treasury rate for R(F), obtain MRP from the Damodaran web site, create a synthetic beta by (1) selecting betas of comparable industry peers, deleverage those betas using the formula (see formula posted on eLearning), average the deleveraged betas, re-leverage the average beta based on the Companys debt/equity ratio and marginal tax rate. Remember: we are assuming the Company is private.
Compute WACC WACC = [(wt of debt x cost) + (wt of preferred x cost) + (wt of common x cost)]
Discount the planning period FCFs to PV using WACC Each FCF/(1+WACC)t. Work up to this point is due for review by the Professor at the start of class on March 9, 2021. It will not be graded yet will serve as a midcourse review to assure things are on track for a strong finish.
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Determine terminal value (TV) using DCF Take the FCF from the last planning period, convert it to next years FCF by FCF (1 + perpetual growth rate) then dividing by (Discount rate perpetual growth rate). [FCF (1 + Gp)/(WACC Gp).] Calculate Enterprise Value using DCF Sum the PVs (Discounted Planning Period PVs and the TV PV). Calculate Equity Value Equity Value = Enterprise Value + Cash Interest Bearing Debt In the event that your FCFF is negative because of extensive investments in CAPEX or NWC, and those investments are financed by issuing debt or equity, then you may want to consider using FCFE and discounting those cash flows with cost of equity rather than WACC. Please discuss this with the Professor before proceeding. Determine the Enterprise Value using relative valuation (Use CapIQ for comparables)
Select a valuation ratio (value relative to EBIT, EBITDA, FCF, PE, PEG, BV, Sales) and justify the selection. You may decide to use more than one ratio.
Determine a group of comparable industry peers (preferably of similar size, debt/equity ratios, and operating leverage).
Average the groups ratios to market value (i.e. MV/EBIT or MV/EBITDA, etc.) to obtain multiples (i.e. MV is 5 X EBIT, 2 X BV, 1.25 X Sales, etc.).
Apply the average EBITA multiple to the Companys EBITDA or EBIT multiple to the Companys EBIT or other valuation ratio you have chosen.
Determine an appropriate illiquidity discount rate, based on the Companys size, debt/equity ratio, leverage ratio, industry, etc. We understand this will be subjective.
Apply the illiquidity discount ratio to the terminal value of a comparable public company to determine the private company value.
Realize that some of the valuation ratios are for Enterprise Value (EBITDA, for instance) and some are for Equity Value (PE for instance). You want to end up with the value of 100% of the common stock, or Equity Value. If you use an Equity Value valuation ratio, then your result will
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be Equity Value. If you use an Enterprise Value valuation ratio, then you will need to adjust Enterprise Value by added cash and deducting interest bearing debt. Several items will be extracted from your report for the purposes of comparison among the various groups, so double check to assure that the following items are included and can be easily found by a reader of your report:
YTM Bottom Up Beta Number of planning periods Growth rate for planning periods Perpetual growth rate WACC Illiquidity discount Valuation ratio used (EBITDA, etc.) Equity Value Using DCF Equity Value Using relative valuation
The report should be word processed in a font and size that is easy to read, and the exhibits should be in one Excel file (multiple tabs OK) and in a format that is easy to follow. Here is a sample table of contents:
1. Overview of the assignment and list of team members. 2. Overview of the Company including analysis of historical income and cash flow. 3. Discussion of the Companys industry with focus on outlook and competitors. 4. Valuation of the Company. This is the guts of the report. In discounted cash flow
valuation, discuss your reasons for major assumptions for growth, WACC, etc. You need to refer to the company, its competitors and the industry as necessary to justify your assumptions. Be concise, use bullet point lists rather that long essays and refer to Excel schedules in appendix as needed. Same for market comparable and control transactions. Discuss how comps were selected.
5. Explain your conclusion of value. Your report should be six to eight pages, not including exhibits, but it can be longer if needed. No clip art needed, just well formatted text and exhibits. Style as well as substance count, just as in the real world. The due date is the start of class on April 29, 2021, and each team will make a brief (10 – 12 minute) presentation of their conclusions to the class (and instructor) on the due date and in the following class. Each team has discretion as to whether or not PowerPoint slides are used. And finally have fun with it! Learning how to value assets will be a skill you can use throughout your life!
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