Commercial Fixture Essay

Suggested questions for the Commercial Fixtures Inc. case ar stipulation below.1. What would you as an outside third party fight under the corresponding conditions (with the same information) for the entire company (both halves)? Why?2. What do you expect Albert Evans to bid for Gordons half(a) interest? Why?3. What should Gordon Whitlock bid for Alberts half interest? Why?4. How would you structure the purchase of the business?Question 1 is a business valuation question. There are a egress of ways to estimate the re entertain of a business. You have probably cover unrivalled or more than of these ways in a preliminary class. The next dickens pages review a few of the various ways to go about it.For a entailmented CF approach of valuing Commercial Fixtures Inc., I will delectation the following templateVALUATION APPROACHES OVERVIEW/REVIEW1. parallel with(predicate) Trades Analysis Using valuation ratios, or multiples of comparable firmsUse one or more valuation ratio s, which include (a) Price-Earnings (b) Market-Book (c) Price-CF (d) Price-Revenues (e) Enterprise place to EBITDA, and (f) some other ratios. The prospective value (price) of the subject firm is quantified intoand compared withone or more of the valuation ratios of its peers. The better the performance of the subject firm relative to comparable firms in the relevant performance measures (as measured by operating ratios), the higher(prenominal) the appropriate valuation ratio for the firm (and vice-versa).2. Liquidation treasure, aka Book Value approachPlace liquidation values on the net work capital and fixed assets of the firm. Include tax write-off benefits, if any. This approach is seldom useful, and will typically serve as a minimum value (unless the firm is in severe distress).3. (i.) Discounted Present Value of the blind drunks Free Cash Flows comm completely referred to as DCF Valuation, or WACC valuationValue of the Firm = PV of coming(prenominal) free specie guid es + PV of storage valuea.Estimate the archetypal 3 to 10 long time free cash flows and calculate the PVs. (A quin year horizon is common, but this can vary.) typically you will use the WACC as your discount rate. Depending on the circumstances, the estimated cash flows may be in stock(predicate) for fewer than five years, or more than five years.b.Estimate the PV of the terminal value. 1 estimate for the terminal value involves assuming perpetual cash flows later the initial time horizon, e.g. i.If the cash flow after 5 years is expected to grow at a rate g for the predictable future Terminal Value5 (TV5) = FCF6 /(k g) = FCF5 (1+ g) / (k g)., where k is the required rate of return. You must discount the TV to time 0, and then add this to the PV of the FCFs during the projection horizon. ii.If the cash flow at the end of 5 years is not expected to grow, i.e., g=0, then the general formula collapses to the PV of a no-growth perpetuity Terminal Value5 = FCF6 / (k-g) = FCF5 (1 + g)/(k g) = FCF5 / kc.Use the Value of the Firm equation above, i.e. sum PV of free cash flows + PV of terminal value . The Value of the firms Equity = Value of the Firm Debt Currently Outstanding.3. (ii.) Adjusted Present Value approach we will only briefly discuss this approach a topic for a future finance course.4. Comments on Valuing the Firm using DCF (or WACC) and APV valuation approachesa.Watch the free cash flows (not reported earnings)In particular, as in the capital budgeting decision actionDepreciation charges are not cash outflows.Investment in wise property or equipment is a cash outflow.Increases in net working capital are cash outflows.Taxes are cash outflowsb.Do not deduct interest expense from FCFs.We want to estimate a value for the full-page business. The return to creditors is reflected in the discount rate used.c.Consider other factors, such as a control premium or a lack of marketability discount. These are mentioned in your textbook, and we will discuss these in class.d.Notice the sensitivity of your estimated firm value to changes in assumptions, particularly the perpetual terminal growth rate, and the discount rate. Typically a range of firm values is calculated from various ranges of these two rates (as suggested in the template on p. 1), particularly when uncertainty is high.