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B6301: Corporate Finance

Clarkson Lumber C
C
Co.
Valuation

Clarkson Valuation

Navin Chopra

1

Clarkson, 1996
• At the beginning of 1996, company is entirely owned by Mr. Clarkson
• Following tight funding during a period of good business performance, the company has obtained debt funding to payoff the trade credit, NP trade
• While financials for the first quarter of 1996 are available, we will value the company as at the beginning of 1996/end of 1995

Clarkson Valuation

Navin Chopra

2

Clarkson Financials
Exhibit 1 Operating Expenses for Years Ending December 31, 1993-1995, and for First Quarter 1996 (thousands of dollars)
1st
Quarter
1996
1993
1994
1995
Net sales
$2,921
$3,477
$4,519
$1,062 a
Cost of Goods Sold:
Beginning inventory
330
337
432
587
Purchases
2,209
2,729
3,579
819
$2,539
$2 539
$3,066
$3 066
$4,011
$4 011
$1,406
$1 406
Ending inventory
337
432
587
607
Total Cost of Goods Sold
$2,202
$2,634
$3,424
$799
Gross profit
719
843
1,095
263
622
717
940
244
Operating expenses b
Earnings before interest and taxes
$97
$126
$155
$19
Interest expense
I t
t
23
42
56
13
Net income before income taxes
$74
$84
$99
$6
c
14
16
22
1
Provision for income taxes
Net income
$60
$68
$77
$5
a

In the first quarter of 1995, sales were $903,000 and net income was $7,000. Operating expenses include a cash salary for Mr. Clarkson of $75,000 in 1993; $80,000 in 1994; $85,000 in 1995; and $22,500 in the first quarter of 1996.

c
Clarkson Lumber was required to estimate its income tax liability for the current tax year and pay four quarterly estimated tax installments during that year. The first $50,000 of pretax profits were taxed at a 15% rate; the next $25,000 were taxed at a 25% rate; the next $25,000 were taxed at a 34% rate; and profits in excess of $100,000 but less than $335,000 were taxed at a 39% rate. b

Clarkson Valuation

Navin Chopra

3

Clarkson Financials
Exhibit 2 Balance Sheets at December 31, 1993-1995, and March 31, 1996 (thousands of dollars) 1st Quarter
1993
1994
1995
1996
Cash
C h
$43
$52
$56
$53
Accounts receivable, net
306
411
606
583
Inventory
337
432
587
607
Current assets
$686
$895
$1,249
$1,243
Property, net
233
262
388
384
Total Assets
$919
$1,157
$1,637
$1,627
Notes payable, banka
Note payable to Holtz, current portion
Notes payable, trade
Accounts payable
Accrued expenses
Term loan, current portion c
T
l
i
Current liabilities
c
Term loan
Note payable, Mr. Holtzb
Total Liabilities
Net worth
Total Liabilities and Net Worth

$ ---213
42
20
$275
140
-$415
504
$919

60
100
-340
45
20
$565
120
100
$785
372
$1,157

390
100
127
376
75
20
$1,088
100
0
$1,188
449
$1,637

399
100
123
364
67
20
$1,073
100
0
$1,173
454
$1,627

a

Interest is computed on the average outstanding loan balance at the rate of prime plus 2 1/2%. Interest is fixed at 11% times the outstanding balance.
Interest is fixed at 10.0% times the outstanding balance; the term loan is secured by the fixed assets and is repayable in semiannual installments of $10,000.
p y
,

b
c

Clarkson Valuation

Navin Chopra

4

Overview of the Valuation Process

Valuation
V l ti
PV(FCF1,…,FCFT)
+ PV(RVT)
=
+
=

=
÷
=

Value Drivers
Sales growth rate
OP margin

Enterprise Value
Non-operating Assets
Firm Value
MV Debt
Equity Value
N
Price per Share

Clarkson Valuation

Cash tax rate
equ e e s
FA requirements
WC requirements
Duration of profitable growth
Cost of Capital

Navin Chopra

5

Defining Free Cash Flow
Free Cash Flows
Revenues
− Operating Expenses

ΔNFA

ΔWC

Clarkson Valuation

=

=
+


=

Operating Profit [= EBIT]
Tax on Operating Profit (Adjusted taxes)
NOPAT
Depreciation
CAPEX
Investment in WC
vest e t
Free Cash Flow

Navin Chopra

6

Free Cash...
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