Business Valuations

**Section A** PixelPlay is an unquoted esports franchise generating an annual post-tax profit (earnings) of $2.5 million. A comparable publicly traded esports company, MetaGaming PLC, has a Price/Earnings (P/E) ratio of 14. Due to PixelPlay being unquoted and less liquid, an acquirer applies a 20% discount to the P/E multiple. What is the estimated equity value of PixelPlay?

**Section B - Case 2: Solaris Grid** *Scenario:* Solaris Grid is a private solar panel installation company looking to be acquired. The acquirer is valuing Solaris Grid using the Free Cash Flow to Firm (FCFF) method. Solaris Grid's FCFF for the coming year (Year 1) is projected to be $4 million. These cash flows are expected to grow at a constant rate of 3% per annum in perpetuity. The company's Weighted Average Cost of Capital (WACC) is 11%, and its Cost of Equity is 15%. The market value of Solaris Grid's debt is $12 million. **Question:** What is the estimated Enterprise Value (total firm value) of Solaris Grid?

**Section B - Case 2: Solaris Grid** *Scenario:* Solaris Grid is a private solar panel installation company looking to be acquired. The acquirer is valuing Solaris Grid using the Free Cash Flow to Firm (FCFF) method. Solaris Grid's FCFF for the coming year (Year 1) is projected to be $4 million. These cash flows are expected to grow at a constant rate of 3% per annum in perpetuity. The company's Weighted Average Cost of Capital (WACC) is 11%, and its Cost of Equity is 15%. The market value of Solaris Grid's debt is $12 million. **Question:** If the acquirer wanted to calculate the **Equity Value** of Solaris Grid based on the DCF valuation above, what would it be?

**Section B - Case 2: Solaris Grid** *Scenario:* Solaris Grid is a private solar panel installation company looking to be acquired. The acquirer is valuing Solaris Grid using the Free Cash Flow to Firm (FCFF) method. Solaris Grid's FCFF for the coming year (Year 1) is projected to be $4 million. These cash flows are expected to grow at a constant rate of 3% per annum in perpetuity. The company's Weighted Average Cost of Capital (WACC) is 11%, and its Cost of Equity is 15%. The market value of Solaris Grid's debt is $12 million. **Question:** Solaris Grid's directors are considering an asset-based valuation approach as an alternative. Which of the following is a major limitation of using the asset-based valuation method for a company like Solaris Grid?

Section A Meridian Corp is valuing a target company, Zenith Ltd, for a cross-border acquisition. Zenith Ltd recently reported Profit After Tax (Earnings) of $8 million. Meridian Corp has identified a suitable proxy company in the same industry with a Price/Earnings (P/E) ratio of 12. However, because Zenith is unlisted and smaller, Meridian decides to apply a 20% discount to the proxy P/E ratio. What is the estimated equity value of Zenith Ltd?

Section A Gamma PLC has just paid a dividend of $0.40 per share. Dividends are expected to grow at 8% for the next year, and then at a constant rate of 4% per annum in perpetuity. The cost of equity is 10%. What is the theoretical ex-dividend market value of one share in Gamma PLC?

Section B - Case 2: Helios Co Helios Co is valuing the target company, Aura Ltd, using the Free Cash Flow to Firm (FCFF) method. Which of the following correctly describes how to arrive at the Equity Value of Aura Ltd using this method?

'RetroWear', an unlisted e-commerce vintage clothing retailer, generated earnings of $400,000 last year. A similar listed company, 'VintageStyle PLC', has a Price/Earnings (P/E) ratio of 15. RetroWear's directors believe a 20% discount should be applied to the P/E ratio due to RetroWear being unlisted. What is the estimated valuation of RetroWear using the adjusted P/E ratio method?

'VertiFarm PLC', a vertical farming company, has just paid a dividend of 20 cents per share. Dividends are expected to grow at 10% for the next year, and then at a constant rate of 4% per annum in perpetuity. The cost of equity is 12%. Using the Dividend Valuation Model, what is the current ex-dividend share price of VertiFarm PLC?

CASE 2: AERODRONE TECH AeroDrone Tech is an ungeared manufacturer of commercial delivery drones. The company currently has a cost of equity of 12%. The board is considering a major restructuring to issue debt and repurchase equity. The corporate tax rate is 25%. The risk-free rate is 4% and the equity risk premium is 6%. AeroDrone's latest financial statements show Operating Profit (EBIT) of $5,000,000. Depreciation was $800,000. Capital expenditure was $1,200,000 and the working capital requirement increased by $300,000. Calculate AeroDrone Tech's Free Cash Flow to the Firm (FCFF). (Enter your answer as a whole number without dollar signs or commas)

CASE 2: AERODRONE TECH AeroDrone Tech is an ungeared manufacturer of commercial delivery drones. The company currently has a cost of equity of 12%. The board is considering a major restructuring to issue debt and repurchase equity. The corporate tax rate is 25%. The risk-free rate is 4% and the equity risk premium is 6%. A private equity firm wants to buy AeroDrone and uses the EV/EBITDA multiple for valuation. AeroDrone's EBITDA is $5,800,000. The industry average EV/EBITDA multiple is 8x. AeroDrone has $2,000,000 in cash and no debt. What is the estimated Equity Value of AeroDrone?

**Section A** ServicePro Ltd generated an operating profit (PBIT) of $5,000,000 last year. Depreciation was $800,000. The company invested $1,200,000 in new non-current assets and working capital increased by $300,000. The corporate tax rate is 20%. What is the Free Cash Flow to the Firm (FCFF) for ServicePro Ltd?

**Section A** Retail giant ShopSmart is looking to acquire a smaller competitor, QuickMart. QuickMart recently reported earnings of $2.5 million. ShopSmart has a Price/Earnings (P/E) ratio of 12, while the average P/E ratio for unlisted companies in the retail sector is 8. QuickMart is an unlisted company. Using the P/E ratio method, what is the most appropriate valuation for QuickMart?

**Section B - Case 2: AeroDynamics PLC** *Scenario:* AeroDynamics PLC, an aerospace manufacturer, is evaluating the acquisition of a target company, HeliParts. HeliParts has just paid an annual dividend of $0.40 per share. Historical dividend data shows that 4 years ago, the dividend was $0.32 per share. HeliParts' cost of equity is estimated at 12%. The company has 5 million ordinary shares in issue. HeliParts also has $10 million of 8% irredeemable bonds trading at $105 per $100 nominal value. The corporate tax rate is 25%. Calculate the historical annual dividend growth rate for HeliParts. (Express your answer as a percentage to two decimal places, e.g., 5.25).

**Section B - Case 2: AeroDynamics PLC** *Scenario:* AeroDynamics PLC, an aerospace manufacturer, is evaluating the acquisition of a target company, HeliParts. HeliParts has just paid an annual dividend of $0.40 per share. Historical dividend data shows that 4 years ago, the dividend was $0.32 per share. HeliParts' cost of equity is estimated at 12%. The company has 5 million ordinary shares in issue. HeliParts also has $10 million of 8% irredeemable bonds trading at $105 per $100 nominal value. The corporate tax rate is 25%. Assuming a constant future dividend growth rate of 5.74%, what is the value of one share in HeliParts using the Dividend Valuation Model (DVM)?

**Section B - Case 2: AeroDynamics PLC** *Scenario:* AeroDynamics PLC, an aerospace manufacturer, is evaluating the acquisition of a target company, HeliParts. HeliParts has just paid an annual dividend of $0.40 per share. Historical dividend data shows that 4 years ago, the dividend was $0.32 per share. HeliParts' cost of equity is estimated at 12%. The company has 5 million ordinary shares in issue. HeliParts also has $10 million of 8% irredeemable bonds trading at $105 per $100 nominal value. The corporate tax rate is 25%. AeroDynamics is also considering an asset-based valuation for HeliParts. Which TWO of the following are valid limitations of using the Net Book Value (NBV) basis for an asset-based valuation?

**Section A** Quantum Logistics is a privately held service firm. Its owners wish to value the company using the Price/Earnings (P/E) ratio method. A suitable listed proxy company has an earnings yield of 8%. Quantum Logistics recently reported an Earnings Per Share (EPS) of $0.40. Using the proxy company's data, what is the estimated share price of Quantum Logistics?

**Section A** BioPharma Innovations has just paid a dividend of $0.50 per share. Dividends are expected to grow at a constant rate of 4% per annum in perpetuity. The shareholders' required rate of return (cost of equity) is 10%. Using the Dividend Valuation Model (DVM), what is the theoretical ex-dividend market price of one share?

**Section B - Case 2: Quantum Mesh Inc** *Scenario:* Quantum Mesh Inc is a tech startup developing AI-driven satellite mesh networks. A venture capital firm is considering a buyout. Quantum Mesh has an operating profit (EBIT) of $5m, depreciation of $1m, and a corporate tax rate of 20%. Capital expenditure for the year was $1.5m, and working capital increased by $0.5m. **Question 1:** What is the Free Cash Flow to the Firm (FCFF) for the year?

Section A GridConnect PLC, a cross-border renewable energy operator, has generated Operating Profit (PBIT) of $40m. Depreciation for the year was $8m. The company invested $12m in new non-current assets and working capital increased by $3m. The corporate tax rate is 25%. What is the Free Cash Flow to the Firm (FCFF) for the year?

Section A Titan E-Sports is a private company looking to be acquired. A suitable listed proxy company has an earnings yield of 8%. Titan E-Sports recently reported Profit After Tax of $2.4m. To account for Titan being unlisted and less liquid, the acquirer demands a 20% discount on the valuation. Using the P/E ratio method, what is the estimated equity value of Titan E-Sports?