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# use horizon value calculation methods to estimate the current market value of a privately held company

In this assignment, you use horizon value calculation methods to estimate the current market value of a privately held company.

Select a non-financial company for which financial information is available for several fiscal years. Obtain financial statements for at least the three most recent years. Use the selected company’s financial statements, together with other information described, to calculate the values indicated in questions 1-4.

Part 1 Determining value multiples

Perpetuity based valuation method

1a. Estimate a growth rate for the company. Use any appropriate method, such as the average of several years’ growth rates for sales (or total revenue), the average of several years’ growth rates in net income (or operating income), or the average dividend growth rate.  Specify how you determine the growth rate.

1. Estimate the required return for the company using the capital asset pricing model if beta is available for the company (assume the risk free rate is 2.5% and the expected market return, 12.5%). If beta is not available, use the company’s average annual stock return for the last three years as the required return.

Valuation estimated by capitalizing an operating variable

2a. Select an appropriate income statement line item from which to estimate a value multiple for an operating variable. E.g., net income can be used to calculate the price earnings ratio; total revenue to calculate the price to sales ratio; total cash flow to calculate the price to cash flow ratio; and etc.

1. Find the value of the selected operating variable for the most recent year.
2. Find the company’s current equity value (market capitalization or price per share * number of shares outstanding).
3. Using 2b and c, calculate the selected value multiple for the public company.

Valuation estimated by capitalizing an asset

3a. Select an appropriate balance sheet line item from which to estimate a value multiple for a non-operating, financial variable.  E.g., book value of equity can be used to calculate the price to book value ratio; total assets to calculate the price to total assets ratio; and etc.

1. Find the value of the selected asset for the most recent year.
2. Using 2c and 3b, calculate the selected value multiple for the public company.

Valuation estimated using a non-financial asset

4a. Find the number of employees for the company for the most recent fiscal year.

1. Using 2c and 4a, calculate the price to employee ratio for the selected company.

Part 2 Determining the value of a privately held company

Assume the value multiples you calculated in part 1 are representative of the entire industry (rather than just the selected company).

1. Estimate the value the privately held company for which the most recent financial statement are attached would have in the market

1. based on valuation using the growing perpetuity method (assuming the required return and growth rate from question 1).

1. using the value multiple for the operating variable calculated in question 2.

1. using the value multiple for a non-operating variable calculated in question 3.

1. using the employee value multiplier calculated in question 4.

1. Briefly discuss the differences in values obtained in question 5 using the different methods, and indicate which estimate(s) of value are likely to be most accurate given the characteristics, the industry, or the principal determinants of value of the firm selected in part 1.

 Income Statement (thousands) Total Revenue 3290 Cost of Revenue 2144 Gross Profit 1146 Operating Expenses Research Development 220 Selling General and Administrative 538 Non Recurring 11 Others 69 Total Operating Expenses 838 Operating Income or Loss 308 Income from Continuing Operations Total Other Income/Expenses Net 23 Earnings Before Interest and Taxes 285 Interest Expense 26 Income Before Tax 259 Income Tax Expense 104 Net Income 155

 Balance Sheet (thousands) Cash And Cash Equivalents 168 Net Receivables 252 Inventory 207 Other Current Assets 12 Total Current Assets 639 Property Plant and Equipment 1266 Goodwill 321 Intangible Assets 162 Other Assets 130 Total Assets 2518 Accounts Payable 176 Short/Current Long Term Debt 118 Other Current Liabilities 205 Total Current Liabilities 499 Long Term Debt 518 Other Liabilities 26 Deferred Long Term Liability Charges 26 Total Liabilities 1069 Common Stock 838 Retained Earnings 654 Other Stockholder Equity -43 Total Stockholder Equity 1449 Number of employees 18

 Statement of cash flows (thousands) Net Income 155 Operating Activities Depreciation 87 Adjustments To Net Income 51 Changes In Accounts Receivables 12 Changes In Liabilities -11 Changes In Inventories 4 Changes In Other Operating Activities -8 Total Cash Flow From Operating Activities 290 Investing Activities Capital Expenditures -22 Investments 12 Other Cash flows from Investing Activities -76 Total Cash Flows From Investing Activities -86 Financing Activities Dividends Paid -128 Sale Purchase of Stock -100 Net Borrowings 0 Other Cash Flows from Financing Activities 0 Total Cash Flows From Financing Activities -228 Effect Of Exchange Rate Changes -12 Change In Cash and Cash Equivalents -36

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