1. Starting a business is less risky than buying and growing a business that someone else has already established.

71.

Income approaches: Rentech, Inc., a biotech firm, is expected to grow rapidly in the next three years and then have a level growth rate for the foreseeable future. The firm expects free cash flows of $342.5 million, $512.3 million, and $750 million over the next three years, and thereafter its cash flows will grow at a steady rate of 8 percent per annum. The company has no nonoperating assets (NOA). If the appropriate WACC is 11.25 percent, what is the enterprise value of this business? Round to the nearest million.

A)

$19,367 million

B)

$18,101 million

C)

$26,190 million

D)

$24,923 million

72.

Income approaches: Shenandoah Corp. is expected to grow rapidly in the next four years and then have a zero growth rate for the foreseeable future. The firm expects free cash flows of $42.5 million, $64.3 million, $77.1 million and $92 million over the next four years, and thereafter its cash flows will stay constant. The company has cash to the tune of $23.4 million. If the appropriate WACC is 10 percent, what is the enterprise value of this business? Round to the nearest million.

A)

$628 million

B)

$864 million

C)

$841 million

D)

$818 million

73.

Income approaches: Electronics, an electronics manufacturer, is expected to grow rapidly in the next five years and then have a stable growth rate for the foreseeable future. The firm expects free cash flows of $262.5 million next year. These cash flows are expected to grow at a 30 percent rate over the following four years, and thereafter its cash flows will grow at a steady rate of 6 percent per annum. The company has nonoperating assets (NOA) of $31 million in the form of cash.. If the appropriate WACC is 9 percent, what is the enterprise value of this business? Round to the nearest million.

A)

$26,490 million

B)

$22,222 million

C)

$19,014 million

D)

$22,191 million

74.

Income approaches: Quicksilver Software Co. is expected to grow rapidly in the next three years and then have no growth for the foreseeable future. The firm expects free cash flows of $9.1 million, $11.4 million, and $17.7 million over the next three years, and thereafter its cash flows will stay constant. The company has no nonoperating assets. If the appropriate WACC is 12 percent and debt of 44.5 million, what is the equity value of this business? Round to the nearest million.

A)

$135 million

B)

$105 million

C)

$45 million

D)

$90 million

75.

Income approaches: You are using the FCFF approach to value a business. The estimated FCFF for next year will be $13.6 million, and it will increase at a rate of 6 percent for each of the following five years. After that point, the FCFF will increase at a rate of 3 percent forever. If the WACC for this firm is 8 percent, what is it worth?

A)

$301 million

B)

354 million

C)

$241 million

D)

$144 million

76.

Income approaches: You are valuing the equity of a company using the FCFE approach and have estimated that the FCFE in the next three years will be $6.25, $7.70, and $8.36 million, respectively. Beginning in year 4, you expect the cash flows to increase at a rate of 4 percent per year for the indefinite future. You estimate that the cost of equity is 12 percent. What is the value of equity in this company?

A)

$77 million

B)

$95 million

C)

$109 million

D)

$60 million

77.

Income approaches: You are valuing the equity of Cirona Corp. using the FCFE approach and have estimated that the FCFE in the next three years will grow at a 8 percent rate from last year's FCFE of $2.1 million. Beginning in year 4, you expect the cash flows to increase at a constant rate of 5 percent per year for the indefinite future. The cost of equity for the firm is10 percent. What is the value of equity in this company?

A)

$42 million

B)

$56 million

C)

$48 million

D)

$6 million

Format: Multiple Choice

Learning Objective: LO 4

Level of Difficulty: hard

78.

Valuing private company:You are interested in investing in a private company. Based on earnings multiples of similar publicly traded firms, you estimate the value of the private company's stock to be $13.44 per share. You plan to acquire a majority of the shares in the company. The expected control premium is 12 percent, while the marketability discount for such a firm is 15 percent. The discount for the key person, one of the founders who may leave the firm upon your control of the firm, is 15 percent. What price should you be willing to pay for these shares?

A)

$14.92

B)

$16.65

C)

$11.80

D)

$10.88

79.

Valuing private company:Keshav Sinha is interested in investing in a private company. Based on earnings multiples of similar publicly traded firms, he estimates the value of the private company's stock to be $21.27 per share. He plans to acquire a majority of the shares in the company. The expected control premium is 10 percent. Keshav estimates the marketability discount for such a firm to be 12 percent. The discount for the key person, one of the founders who may leave the firm upon Keshav's control of the firm, is 20 percent. What price should he be willing to pay for these shares?

A)

$16.47

B)

$31.45

C)

$15.72

D)

$32.94

80.

Valuing private company:Shane Bauer wants to invest in Trajectory Tech, a private company. Based on earnings multiples of similar publicly traded firms, Shane estimates the value of the private company's stock to be $18.97 per share. He plans to acquire a majority of the shares in the company. The expected control premium is 12 percent. He estimates the marketability discount for such a firm to be 15 percent. The discount for the key person, one of the founders who may leave the firm upon Shane's control of the firm, is 15 percent. What price should he be willing to pay for these shares?

A)

$15.35

B)

$28.10

C)

$14.05

D)

$30.70

81.

What difficulties are associated with valuing real assets compared to financial assets?

82.

Explain how valuations can differ between public and private companies and between young and mature companies as well as the importance of marketability, control, and key person considerations in valuation.

83.

What are some things to watch out for when doing multiples analysis?

84.

Why does the value of a business change over time?