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Valcon 4

1. The document provides examples of using the earnings and market approach to valuation. It shows calculations for valuing companies based on bond yields, treasury bond returns, cash flows, lease income, and discounted future earnings. 2. Sections 7-10 demonstrate calculations for valuing a company (ABC Company) based on market value of invested capital (MVIC) and market value of equity (MVEq), using parameters from another company (CDE company). 3. The minimum issue price for 20% ownership of ABC Company is calculated in two examples as $17.4 million and $18 million based on the MVEq.

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5K views153 pages

Valcon 4

1. The document provides examples of using the earnings and market approach to valuation. It shows calculations for valuing companies based on bond yields, treasury bond returns, cash flows, lease income, and discounted future earnings. 2. Sections 7-10 demonstrate calculations for valuing a company (ABC Company) based on market value of invested capital (MVIC) and market value of equity (MVEq), using parameters from another company (CDE company). 3. The minimum issue price for 20% ownership of ABC Company is calculated in two examples as $17.4 million and $18 million based on the MVEq.

Uploaded by

Kim Bihag
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLSX, PDF, TXT or read online on Scribd
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Chapter 5: Earnings and Market Approch Valuation

MC Problems

1 HBB Co.

Annual Return of Bonds 400,000.00


Rate of Returm 0.10
Value of HBB company 4,000,000.00

2 HCB Co.

Quarterly Return of Treasury Bonds 400,000.00


Multiply by 4.00
Annual Return of Treasury Bonds 1,600,000.00
Divide by: Rate of Return (1.6M/4M) 0.40
Value of HCB Company 4,000,000.00

3 Heart Inc.

Cash Flow 1,000,000.00


Operating Expenses (600,000.00)
Net Cash Flow 400,000.00
Divide by: Value of Heart Inc. less Premium 5,000,000.00
Capitalization Rate used by Heart Inc. 0.08

4 Lease Income per month 750.00


Multiply by 12 months 12.00
Lease Income per year 9,000.00
Operating Expense (5,000.00)
Net Cash Flow 4,000.00
Capitalization Rate 0.10
Value of Property 40,000.00

5 Heinz Inc.

Year Earnings PV Factor


1 50,000.00 0.91
2 60,000.00 0.83
3 65,000.00 0.75
4 70,000.00 0.68
5 750,000.00 0.62
Present Value of the firm

6 Herbert Inc.

Year Earnings Discount Rate


1.00 50,000.00 0.89
2.00 60,000.00 0.80
3.00 65,000.00 0.71
4.00 70,000.00 0.64
5.00 750,000.00 0.57
Present Value of the firm

7 to 10 ABC Company

7 MVIC
MVIC= (Price/Parameter)ABC company x Parameter CDE company
MVIC= 150,000,000/100,000,000 x 80,000,000
MVIC= 120,000,000.00

MVEq
MVEq= MVIC - debt
MVEq= 120,000,000 - (90,000,000-60,000,000)
MVEq= 90,000,000.00

8 MVIC
MVIC= MVEq + debt
MVIC= 87,000,000 + (90,000,000 - 60,000,000)
MVIC= 117,000,000.00

MVEq= [(MVIC-debt)/parameter] ABC company X parameter CDE company


MVEq= 150,000,000 - 20,000,000)/15,000,000 x 10,000,000
MVEq= 87,000,000.00
9 Minimum issue price for 20% = MVEq x 20%
Minimum issue price for 20% = 80,000,000 x 20%
Minimum issue price for 20% = 18,000,000.00

10 Minimum issue price for 20% = MVEq x 20%


Minimum issue price for 20% = 87,000,000 x 20%
Minimum issue price for 20% = 17,400,000.00
A

Net Cash Flows


45,454.55
49,586.78
48,835.46
47,810.94
465,690.99
657,378.72 B

Net Cash Flows


44,642.85
47,831.63
46,265.72
44,486.27
425,570.14
608,796.61 B

E company

D
A

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