Question Details

(solution) What is the company's value using the following methods: a)


What is the company's value using the following methods:

a) Residual Income

b) Free Cash Flow

c) If Owners decide to issue 1,000,000 common shares, how much would be the value for each share?

d) Analyze and explain which one of the above valuation methods provides a better and more realistic valuation.


you are required to perform valuation for HES Company as given below.

Show detail work and discuss any assumptions you make.

Consider HES Company?s financial statements given below. Assume the Company?s beta is estimated to be 1.5, risk free rate 2%, and

market risk premium 10%. Furthermore, assume the company has a long-term growth rate for 2% after the fifth year and net income and

comprehensive income will be identical.

What is the company's value using the following methods:

a) Residual Income

b) Free Cash Flow

c) If Owners decide to issue 1,000,000 common shares, how much would be the value for each share?

d) Analyze and explain which one of the above valuation methods explains provides a better and more realistic valuation


you are required to perform valuation for HES Company as given below.

 

Show detail work and discuss any assumptions you make.

 

Consider HES Company?s financial statements given below. Assume the Company?s beta is estimated to be 1.5, risk free rate 2%, and

 

market risk premium 10%. Furthermore, assume the company has a long-term growth rate for 2% after the fifth year and net income and

 

comprehensive income will be identical.

 

What is the company's value using the following methods:

 

a) Residual Income

 

b) Free Cash Flow

 

c) If Owners decide to issue 1,000,000 common shares, how much would be the value for each share?

 

d) Analyze and explain which one of the above valuation methods provides a better and more realistic valuation. Revenues

 

Cost of Sales

 

Gross Profit

 

Accounting

 

Advertising & Promotion

 

Bank Charges

 

Compensation &

 

Benefits

 

Consulting Fees

 

Insurance

 

Lease - Facilities

 

Legal & Professional

 

Licenses & Fees

 

Maintenance

 

Miscellaneous

 

Office supplies

 

Security

 

Telephone

 

Utilities

 

Website

 

Total Operating Exp.

 

EBIDTA

 

Depreciation

 

Operating Profit

 

Interest Expense

 

Earnings Before Taxes

 

Income Taxes

 

Net Income Income Statement

 

Year 1

 

Year 2

 

Year 3

 

Year 4

 

Year 5

 

$1,976,000

 

$2,074,800

 

$2,178,540 $2,287,467

 

$2,401,840

 

1,213,659

 

1,274,342

 

1,338,059

 

1,404,962

 

1,475,210

 

$762,341

 

$800,458

 

$840,481

 

$882,505

 

$926,630

 

6,000

 

15,000

 

41,496 6,300

 

12,360

 

43,571 6,615

 

12,731

 

45,749 6,946

 

13,113

 

48,037 7,293

 

13,506

 

50,439 246,643 254,042 261,663 269,513 277,598 2,400

 

1,000

 

336,000

 

500

 

500

 

600

 

1,800

 

2,700

 

720

 

1,800

 

4,200

 

1,800

 

663,159

 

$99,182

 

4,916

 

$94,266

 

43,199

 

51,067

 

17,873

 

$33,194 0

 

1,050

 

336,000

 

500

 

510

 

612

 

1,836

 

2,754

 

742

 

1,836

 

4,410

 

1,800

 

668,323

 

$132,135

 

4,916

 

$127,219

 

40,274

 

86,945

 

30,431

 

$56,514 0

 

1,103

 

336,000

 

500

 

520

 

624

 

1,873

 

2,809

 

764

 

1,873

 

4,631

 

1,800

 

679,255

 

$161,226

 

4,916

 

$156,310

 

37,059

 

119,251

 

41,738

 

$77,513 0

 

1,158

 

336,000

 

500

 

531

 

637

 

1,910

 

2,865

 

787

 

1,910

 

4,862

 

1,800

 

690,569

 

$191,936

 

4,916

 

$187,020

 

33,524

 

153,496

 

53,724

 

$99,772 0

 

1,216

 

336,000

 

500

 

541

 

649

 

1,948

 

2,923

 

810

 

1,948

 

5,105

 

1,800

 

702,276

 

$224,354

 

4,916

 

$219,438

 

29,639

 

189,799

 

66,429

 

$123,370 Balance sheets

 

Begin Year 2 Year 3 Year 4 $33,150

 

425,000

 

28,000 $110,697

 

425,000

 

28,000 $210,697

 

424,781

 

28,000 $243,259

 

446,020

 

28,000 $293,834

 

468,321

 

28,000 $363,370

 

491,737

 

28,000 $486,150 $563,697 $663,478 $717,279 $790,155 $883,107 Fixed Assets

 

Less: Depreciation

 

Net Fixed Assets

 

Total Assets 33,850

 

0

 

33,850

 

$520,000 33,850

 

4,916

 

28,934

 

$592,631 33,850

 

9,832

 

24,018

 

$687,496 33,850

 

14,747

 

19,103

 

$736,382 33,850

 

19,664

 

14,186

 

$804,341 33,850

 

24,579

 

9,271

 

$892,378 Accounts Payable

 

Long Term Debt

 

Total Liabilities

 

Owner's Equity

 

Paid-in Capital

 

Retained Earnings

 

Total Liabilities &

 

Equity 0

 

468,000

 

468,000 68,908

 

438,529

 

507,437 139,654

 

406,133

 

545,787 146,637

 

370,522

 

517,159 153,968

 

331,377

 

485,345 161,667

 

288,346

 

450,013 52,000

 

0 52,000

 

33,194 52,000

 

89,709 52,000

 

167,223 52,000

 

266,996 52,000

 

390,365 $520,000 $592,631 $687,496 $736,382 $804,341 $892,378 Cash

 

Inventory

 

Prepaid Leases

 

Total Current Assets Year 1 Cash Flow Statements

 

Year 1

 

Operating Profit

 

Add: Depreciation

 

Working Capital

 

Investment

 

Cash From Operations

 

Interest Expense

 

Income Taxes

 

Net Cash Before Debt

 

Pmt

 

Debt Payment

 

Change in Cash

 

Cash Reconciliation

 

Beginning Cash

 

Change in Cash

 

Ending Cash $94,266

 

4,916

 

99,182 Year 2 Year 3 Year 4 Year 5 $127,219

 

4,916

 

132,135 $156,310

 

4,916

 

161,226 $187,020

 

4,916

 

191,936 $219,438

 

4,916

 

224,354 -68,908 -70,966 14,256 14,968 15,719 168,090

 

43,199

 

17,873 203,101

 

40,274

 

30,431 146,970

 

37,059

 

41,738 176,968

 

33,524

 

53,724 208,635

 

29,639

 

66,429 107,018 132,396 68,173 89,720 112,567 29,471

 

$77,547 32,396

 

$100,000 35,611

 

$32,562 39,145

 

$50,575 43,031

 

$69,536 $33,150

 

77,547

 

$110,697 $110,697

 

100,000

 

$210,697 $210,697

 

32,562

 

$243,259 $243,259

 

50,575

 

$293,834 $293,834

 

69,536

 

$363,370 Year 5

 


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