The Free Cash Flow Business Valuation Model

Instructions: Change any of the forecasting variables shown in red below and observe the effect on the model's
outputs in the section below. To what variable is the business value conclusion most sensitive? To what variable
is it least sensitive?

The Discounted Free Cash Flow Model for a Complete Business

Pie In the Sky Company
Forecasting Variables:

2002 2003 2004 2005 2006

Revenue growth factor
Expected gross profit margin
S, G, & A expense % of revenue
Depr. & Amort. % of revenue
Capital expenditure growth factor
Net working capital to sales ratio
Income tax rate
Assumed long-term sustainable growth rate
Discount rate

2007

2008

2009

2010

2011

60%
54%
28%
10%
20%
15%

50%
55%
27%
10%
-10%
14%

40%
56%
26%
10%
-15%
13%

30%
57%
25%
10%
-20%
12%

20%
58%
24%
10%
-25%
11%

10%
59%
23%
10%
-30%
10%

2002 2003 2004 2005 2006

2007

2008

2009

2010

2011

50% 51% 52% 53% 54%

-10%
1% 12% 10% 10%
($1.3) ($1.4) ($1.3) ($1.4) ($1.0)

55%
11%
$0.7

56%
12%
$2.8

57%
13%
$5.2

58%
14%
$7.3

59%
16%
$8.8
$61.8

20%
50%
50%
10%
40%
19%

30%
51%
40%
10%
35%
18%

40%
5% per year after 2011
20%

40%
52%
30%
10%
30%
17%

50%
53%
29%
10%
25%
16%
40%
5%
20%

Valuation Model Outputs:

Gross profit margin

Net operating profit margin
Free cash flow ($ mil)
Terminal value ($ mil)
PV of Company Operations ($ mil)

$11.1

Market Value of Company Assets ($ mil)

$11.6

The Discounted Free Cash Flow Model for a Complete Business

Pie In the Sky Company
Years Ending December 31
Actual |------------------------------------------------------------------------------------------ Forecast ----------------------------------------------------------------------------------------|
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Total revenue

$2,000,000

$2,400,000

$3,120,000

$4,368,000

$6,552,000 $10,483,200 $15,724,800 $22,014,720 $28,619,136 $34,342,963

$37,777,260

Cost of Goods Sold

Gross profit

1,200,000
800,000

1,200,000
1,200,000

1,528,800
1,591,200

2,096,640
2,271,360

3,079,440
3,472,560

4,822,272
5,660,928

7,076,160
8,648,640

9,686,477
12,328,243

12,306,228
16,312,908

14,424,045
19,918,918

15,488,676
22,288,584

Selling, general and administrative expenses

Earnings before interest, taxes, depr. & amort. (EBITDA)

1,200,000
(400,000)

1,200,000
0

1,248,000
343,200

1,310,400
960,960

1,900,080
1,572,480

2,935,296
2,725,632

4,245,696
4,402,944

5,723,827
6,604,416

7,154,784
9,158,124

8,242,311
11,676,607

8,688,770
13,599,814

Depreciation and amortization

Earnings before Interest and taxes (EBIT)
Available tax-loss carryforwards
Net taxable earnings

200,000
(600,000)
0
0

240,000
(240,000)
(600,000)
0

312,000
31,200
(840,000)
0

436,800
524,160
(808,800)
0

655,200
917,280
(284,640)
632,640

1,048,320
1,677,312
0
1,677,312

1,572,480
2,830,464
0
2,830,464

2,201,472
4,402,944
0
4,402,944

2,861,914
6,296,210
0
6,296,210

3,434,296
8,242,311
0
8,242,311

3,777,726
9,822,088
0
9,822,088

Federal and State Income Taxes

Net Operating Profit After-Tax (NOPAT)

0
(600,000)

0
(240,000)

0
31,200

0
524,160

253,056
664,224

670,925
1,006,387

1,132,186
1,698,278

1,761,178
2,641,766

2,518,484
3,777,726

3,296,924
4,945,387

3,928,835
5,893,253

1,572,480
(3,316,950)
733,824
$687,632

2,201,472
(2,819,408)
817,690
$2,841,521

2,861,914
(2,255,526)
792,530
$5,176,644

3,434,296
(1,691,645)
629,621
$7,317,659

3,777,726
(1,184,151)
343,430
$8,830,257

Add back depreciation and amortization

Subtract Capital Expenditures
Subtract New Net Working Capital
Free Cash Flow

200,000
(1,000,000)

240,000
312,000
436,800
655,200
1,048,320
(1,400,000) (1,890,000) (2,457,000) (3,071,250) (3,685,500)
76,000
129,600
212,160
349,440
589,680
($1,400,000) ($1,324,000) ($1,417,200) ($1,283,880) ($1,402,386) ($1,041,113)

Terminal value, 2011

$61,811,799

Present Value of Free Cash Flows @ 20%

(1,103,333)

(984,167)

(742,986)

(676,305)

Total Present Value of Company Operations

$11,129,331
Plus Current Assets
500,000 from Pie in the Skys' December 31, 2001 Balance Sheet
Total Market Value of Great Expectations' Assets

$11,629,331

(418,400)

230,287

793,016

1,203,922

1,418,211

11,409,086