Investment Banking, 2E

Valuation, Leveraged Buyouts,

and Mergers & Acquisitions
DCF Analysis - Template

JOSHUA ROSENBAUM
JOSHUA PEARL

ValueCo Corporation
Discounted Cash Flow Analysis
($ in millions, fiscal year ending December 31)
Operating Scenario
1
Mid-Year Convention
Y

Operating Scenario

1998
Sales
% growth
Cost of Goods Sold
Gross Profit
% margin
Selling, General & Administrative
EBITDA
% margin
Depreciation & Amortization
EBIT
% margin
Taxes
EBIAT
Plus: Depreciation & Amortization
Less: Capital Expenditures
Less: Inc./(Dec.) in Net Working Capital
Unlevered Free Cash Flow
WACC
Discount Period
Discount Factor
Present Value of Free Cash Flow

CAGR
('98 - '01)
-

($807.2)

$342.3
-x
$3,747.7
0.55
$2,075.3
163.7%

Enterprise Value

$1,268.1

-1.0x
(4,810)
(5,160)
(5,640)
(6,330)
(7,382)

Enterprise Value
Exit Multiple
-0.5x
0.0x
(4,810)
(4,810)
(5,160)
(5,160)
(5,640)
($5,640)
(6,330)
(6,330)
(7,382)
(7,382)

Projection Period
2004
$805.4
33.0%
$805.4
100.0%
658.8
$146.6
18.2%
24.2
$122.4
15.2%
41.6
$80.8

$320.4
100.0%
283.2
$37.2
11.6%
10.4
$26.8
8.4%
3.4
$23.4

2002
$448.6
40.0%
$448.6
100.0%
375.4
$73.1
16.3%
13.5
$59.7
13.3%
20.3
$39.4

2003
$605.6
35.0%
$605.6
100.0%
495.3
$110.2
18.2%
18.2
$92.0
15.2%
31.3
$60.7

4.0
205.8
-

10.4
233.8
(32.4)

13.5
(269.1)
(29.0)

18.2
(242.2)
(31.0)

$188.8

$235.2

($245.3)
0.5
0.97
($237.4)

$104.6
100.0%
121.8
($17.2)
(16.4%)
4.0
($21.2)
(20.3%)
(0.2)
($21.0)

2001
$320.4
206.3%

Implied Equity Value and Share Price

Enterprise Value
Less: Total Debt
Less: Preferred Stock
Less: Noncontrolling Interest
Plus: Cash and Cash Equivalents
Implied Equity Value
Fully Diluted Shares Outstanding

1.0x
(4,810)
(5,160)
(5,640)
(6,330)
(7,382)

2006
$1,188.8
20.0%
$1,188.8
100.0%
972.4
$216.4
18.2%
35.7
$180.7
15.2%
61.4
$119.3

2007
$1,379.0
16.0%
$1,379.0
100.0%
1,143.2
$235.8
17.1%
41.4
$194.4
14.1%
66.1
$128.3

24.2
(273.8)
(32.0)

29.7
(237.8)
(31.0)

35.7
(237.8)
(34.0)

41.4
(248.2)
(36.0)

($194.3)

($200.9)

($139.7)

(116.8)

(114.5)

1.5
0.91
($176.1)

2.5
0.85
($170.5)

3.5
0.79
($111.0)

4.5
0.74
($86.9)

5.5
0.70
($79.8)

Implied Perpetuity Growth Rate

Terminal Year Free Cash Flow (2010E)
WACC
Terminal Value

$137.8
6.8%
$3,747.7

$1,268.1
(345.7)
117.5

Implied Perpetuity Growth Rate

$25.61

0.0
-1.0%
-0.5%
0.0%
0.5%
1.0%

3.0%

Implied EV/EBITDA
Enterprise Value
LTM 9/30/2012 EBITDA

40.6

Implied Share Price

0.5x
(4,810)
(5,160)
(5,640)
(6,330)
(7,382)

2005
$990.6
23.0%
$990.6
100.0%
810.3
$180.3
18.2%
29.7
$150.6
15.2%
51.2
$99.4

$1,040.0

WACC

Terminal Value
Terminal Year EBITDA (2010E)
Exit Multiple
Terminal Value
Discount Factor
Present Value of Terminal Value
% of Enterprise Value

1,268.1
-1.0%
-0.5%
0.0%
0.5%
1.0%

2000
$104.6
-

6.8%

Enterprise Value
Cumulative Present Value of FCF

WACC

Historical Period
1999
NA
-

Base

$1,268.1
-

Implied EV/EBITDA

-1.0x
3.0%
3.0%
3.0%
3.0%
3.0%

Implied Perpetuity Growth Rate

Exit Multiple
-0.5x
0.0x
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%

-x

0.5x
3.0%
3.0%
3.0%
3.0%
3.0%

1.0x
3.0%
3.0%
3.0%
3.0%
3.0%

ValueCo Corporation
Sensitivity Analysis

0.0
-1.0%
-0.5%
0.0%
0.5%
1.0%

-1.0x
3.0%
3.0%
3.0%
3.0%
3.0%

Implied Perpetuity Growth Rate

Exit Multiple
-0.5x
0.0x
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%
3.0%

1.6
-1.0%
-0.5%
0.0%
0.5%
1.0%

0.5x
(4,810)
(5,160)
(5,640)
(6,330)
(7,382)

0.5x
3.0%
3.0%
3.0%
3.0%
3.0%

1.0x
(4,810)
(5,160)
(5,640)
(6,330)
(7,382)

1.0x
3.0%
3.0%
3.0%
3.0%
3.0%

1,040.0
-1.0%
-0.5%
0.0%
0.5%
1.0%

WACC

-1.0x
(4,810)
(5,160)
(5,640)
(6,330)
(7,382)

-x
WACC

1,268.1
-1.0%
-0.5%
0.0%
0.5%
1.0%

Enterprise Value
Exit Multiple
-0.5x
0.0x
(4,810)
(4,810)
(5,160)
(5,160)
(5,640)
($5,640)
(6,330)
(6,330)
(7,382)
(7,382)

WACC

WACC

WACC

($ in millions, fiscal year ending December 31)

-1.0%
-0.5%
0.0%
0.5%
1.0%

PV of Terminal Value % of Enterprise Value

Exit Multiple
6.5x
7.0x
7.5x
8.0x
80.8%
80.8%
80.8%
80.8%
82.2%
82.2%
82.2%
82.2%
83.9%
83.9%
83.9%
83.9%
85.8%
85.8%
85.8%
85.8%
87.9%
87.9%
87.9%
87.9%

-1.0x
(5,038)
(5,388)
(5,869)
(6,558)
(7,610)

6.5x
-x
-x
-x
-x
-x

8.5x
80.8%
82.2%
83.9%
85.8%
87.9%

Implied Equity Value

Exit Multiple
-0.5x
0.0x
(5,038)
(5,038)
(5,388)
(5,388)
(5,869)
($5,869)
(6,558)
(6,558)
(7,610)
(7,610)

Implied Enterprise Value / LTM EBITDA

Exit Multiple
7.0x
0.0x
-x
-x
-x
-x
-x
-x
-x
-x
-x
-x

0.5x
(5,038)
(5,388)
(5,869)
(6,558)
(7,610)

1.0x
(5,038)
(5,388)
(5,869)
(6,558)
(7,610)

0.5x
-x
-x
-x
-x
-x

1.0x
-x
-x
-x
-x
-x

ValueCo Corporation
Working Capital Projections
($ in millions, fiscal year ending December 31)

Sales
Cost of Goods Sold

Historical Period
1999
-

Current Assets
Accounts Receivable
Inventories
Prepaid Expenses and Other
Total Current Assets

21.6
1.1
2.7
$25.4

20.8
2.2
3.7
$26.7

124.1
15.6
$139.7

182.5
23.0
$205.5

246.1
31.0
$277.1

306.7
38.6
$345.3

372.1##
-##
46.9##
$419.0##

Current Liabilities
Accounts Payable
Accrued Liabilities
Other Current Liabilities
Total Current Liabilities

12.9
5.6
5.3
$23.8

24.5
18.3
16.0
$58.8

32.4
30.6
$63.1

47.7
45.1
$92.8

64.4
60.8
$125.2

80.2
75.7
$155.9

$1.6
1.5%

$34.0
10.6%

$63.0
10.5%

$94.0
10.6%

$126.0
10.6%

($1.6)

($32.4)

($29.0)

($31.0)

1998

Net Working Capital

% sales
(Increase) / Decrease in NWC

2000
$104.6
-

2001
$320.4
-

2002
$600.8
-

Projection Period
2003
2004
$884.0
$1,192.0
-

2005
$1,485.0
-

2006
### 2008
$1,802.0
### $2,466.0
-##
-

2009
$2,694.0
-

2010
$2,912.0
-

-##
97.3##
91.9##
$189.2##

$157.0
10.6%

$191.0
###
10.6%
###

$261.0
10.6%

$285.0
10.6%

$308.0
10.6%

($32.0)

($31.0)

($34.0)
###

($34.0)

($24.0)

($23.0)

Assumptions
Current Assets
Days Sales Outstanding
Days Inventory Held
Prepaids and Other CA (% of sales)

75.4
-

75.4
-

75.4
-

75.4
-

75.4
-

75.4
-

75.4
-

-%

-%

2.6%

2.6%

2.6%

2.6%

2.6%

2.6%

2.6%

Current Liabilities
Days Payable Outstanding
Accrued Liabilities (% of sales)
Other Current Liabilities (% of sales)

-%
-%

-%
-%

5.4%
5.1%

5.4%
5.1%

5.4%
5.1%

5.4%
5.1%

5.4%
5.1%

5.4%
5.1%

5.4%
5.1%

ValueCo Corporation
Weighted Average Cost of Capital Analysis
($ in millions)

Equity-to-Total Capitalization

67.7%
32.3%

Cost of Debt
Cost-of-Debt
Tax Rate
After-tax Cost of Debt

7.6%
34.0%
5.0%

Cost of Equity
Risk-free Rate (1)
Market Risk Premium (2)
Levered Beta
Size Premium (3)
Cost of Equity

WACC

Comparable Companies Unlevered Beta

Predicted
Company
Levered Beta (4)
CompCo A
CompCo B
CompCo C
CompCo D
CompCo E
Mean
Median

Market
Value of Debt
-

Market
Value of Equity
-

Debt/
Equity

Marginal
Tax Rate
-%
-%
-%
-%
-%

Unlevered
Beta
-

-%
-%
-%
-%
-%

-%
-%

ValueCo Relevered Beta

Mean
Unlevered
Beta

5.0%
5.0%
1.10
-%
10.5%

Relevered Beta

Target
Debt/
Equity
-

209.6%

Target
Marginal
Tax Rate

Relevered
Beta
-

34.0%

WACC Sensitivity Analysis

6.8%

(1) Interpolated yield on 20-year U.S. Treasury, sourced from Bloomberg

(2) Obtained from Ibbotson SBBI Valuation Yearbook
(3) Mid-cap Decile size premium based on market capitalization, per Ibbotson
(4) Sourced from Bloomberg

Debt-to-Total
Capitalization

WACC Calculation
Target Capital Structure
Debt-to-Total Capitalization

0.1
-20.0%
-10.0%
0.0%
10.0%
20.0%

-1.0%
12.7%
11.6%
10.5%
9.4%
8.3%

-0.5%
12.7%
11.6%
10.5%
9.4%
8.3%

Pre-tax Cost of Debt

0.0%
12.6%
11.6%
10.5%
9.5%
8.4%

0.5%
12.5%
11.5%
10.5%
9.5%
8.5%

1.0%
12.5%
11.5%
10.5%
9.5%
8.5%

Assumptions Page 1 - Income Statement and Cash Flow Statement

Projec
Year 1
2002

Year 2
2003

Year 3
2004

Year 4
2005

Income Statement Assumptions

Sales (% growth)
Base
Upside
Management
Downside 1
Downside 2

1
2
3
4
5

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

Cost of Goods Sold (% sales)

Upside
Management
Base
Downside 1
Downside 2

1
2
3
4
5

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

SG&A (% sales)
Base
Upside
Management
Downside 1
Downside 2

1
2
3
4
5

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

Depreciation & Amortization (% sales)

Base
Upside
Management
Downside 1
Downside 2

1
2
3
4
5

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

Cash Flow Statement Assumptions

Capital Expenditures (% of sales)
Base
Upside
Management
Downside 1
Downside 2

1
2
3
4
5

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

Projection Period
Year 5
Year 6
2006
2007

Year 7
2008

Year 8
2009

Year 9
2010

Year 10
2011

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

Assumptions Page 2 - Balance Sheet

Projec
Year 1
2002
Current Assets
Days Sales Outstanding (DSO)
Base
Upside
Management
Downside 1
Downside 2
Days Inventory Held (DIH)
Base
Upside
Management
Downside 1
Downside 2

Year 2
2003

Year 3
2004

Year 4
2005

1
2
3
4
5

75.4
75.4
-

75.4
75.4
-

75.4
75.4
-

75.4
75.4
-

1
2
3
4
5

0.1
0.1
-

0.1
0.1
-

0.1
0.1
-

0.1
0.1
-

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

Prepaid and Other Current Assets (% of sales)

1
Base
2
Upside
3
Management
4
Downside 1
5
Downside 2
Current Liabilities
Days Payable Outstanding (DPO)
Base
Upside
Management
Downside 1
Downside 2

1
2
3
4
5

Accrued Liabilities (% of sales)

Base
Upside
Management
Downside 1
Downside 2

1
2
3
4
5

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

Other Current Liabilities (% of sales)

Base
Upside
Management
Downside 1
Downside 2

1
2
3
4
5

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

Projection Period
Year 5
Year 6
2006
2007

Year 7
2008

Year 8
2009

Year 9
2010

Year 10
2011

75.4
75.4
-

75.4
75.4
-

75.4
75.4
-

75.4
75.4
-

75.4
75.4
-

75.4
75.4
-

0.1
0.1
-

0.1
0.1
-

0.1
0.1
-

0.1
0.1
-

0.1
0.1
-

0.1
0.1
-

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

-%
-%
-%
-%
-%
-%

Copyright 2013 by Joshua Rosenbaum and Joshua Pearl. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data:

ISBN-13 978-0-470-44220-3
Printed in the United States of America
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