Cost of debt

Taking the total outstanding debt for Bluntly from the Balance sheet (current + long term
“Loans Payable”) and comparing this to the interest expense paid in 2013. We utilize
this approximation since we do not have any bank loans to use as a reference point or a
rated bond. Tax rate is 35%. We get 13,000 / 166,000 = 7.83%

Cost of equity
Using the CAPM, we can estimate the cost of equity for Bluntly, Need three data points
1 Risk free rate = 3%. The case states that the 10 year US treasury bond rate is 2.69,
but we will use 3% per the instructor’s guidance and for simplicity.
2 Market risk premium (Rm-Rf) = 7%. Here, we will utilize the generally accepted
historical Market Risk Premium of the S&P 500 as a proxy of the MRP for our
calculations. We estimate nonsystematic risk premium=.5%
3. Beta = 1.09. For our calculations, we will utilize the average of 5 Year Levered Betas
(Exhibit 9) as noted in the case as comparable betas. We utilize this proxy as Bluntly
Media is not a publicly listed company, and therefore we do not have sufficient
information to calculate a stock beta. Comparable betas are served as a reasonable
approximation of what beta we can expect; given that we are not aware of what the
target debt to equity ratio is for Bluntly Media. We picked the comparable firms that
have similar operations and data and we use the mean of the comparables to get
levered beta. We get cost of equity R = .03 + 1.09(.07+0.005) = 11.2%

WACC
WACC Calculation
Market Assumption
Rish Free Rate of Return 3.00%
U.S. Market Equity Risk Premium 7.00%
Nonsystematic Risk Premium 0.50%
Tax Rate 35.00%

Capital Structure Assumptions

Debt to Total Capitalization 24.00%
PS to Taltal Capitalization 0.00%
Equity to Total Capitalization 76.00%
Cost of Debt 7.83%
Cost of PS N/A

Cost of Equity for Computed WACC

Comuted Levered Beta 1.09
Cost of Equity 11.2%

Computed WACC 9.7%

We use the median debt/equity ratio from selected comparables as Bluntly Media’s
debt/equity ratio. We get debt to total capitalization = 24%. Equity to total capitalization
= 76%. WACC = weight of equity * cost of equity + weight of debt * cost of debt * (1-T) =
76% * 11.2%. + 24% * 7.83% * (1 – 35%) = 9.7%

FCFs

Terminal
2014 2015 2016 2017 2018 Year
Sales $96,364.0 $99,447.7 $102,630.0 $105,914.2 $109,303.4 $109,303.4
EBITDA $1,268.3 $1,308.9 $1,350.8 $1,394.0 $1,438.6 $1,438.6
EBIT $1,211.4 $1,250.6 $1,291.0 $1,332.7 $1,375.8 $1,375.8
Less: Taxes ($424.0) ($437.7) ($451.9) ($466.5) ($481.5) ($481.5)
Tax Rate % 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%
NOPAT $787.4 $812.9 $839.2 $866.3 $894.3 $894.3

Add: D&A $56.9 $58.3 $59.8 $61.3 $62.8 $62.8

Less: CapEx ($116.6) ($120.3) ($124.2) ($128.2) ($132.3) ($62.8)
Less: Change in NWC ($12.6) ($12.8) ($13.1) ($13.4) ($13.6) --
Unlevered Free Cash Flow 0 $715.1 $738.0 $761.6 $786.0 $811.2 $894.3
FCF Growth Rate 3% 3% 3% 3%
Discount Period 0.5 1.5 2.5 3.5 4.5
Discount Factor 9.7% 0.95 0.87 0.79 0.72 0.65
Present value $681.8 $639.7 $600.2 $563.1 $528.3

DCF
x
Perpetuity Growth Method EBITDA Multiple Method

Terminal Year FCF $894.3 Terminal EBITDA (2021) $1,438.63

Perpetuity Growth Rate 2% Terminal Multiple 10.0x
Terminal Value $11,785.4 Terminal Value $14,352.65
Discount Period 4.5 Discount Period 5
Discount Factor 0.66 Discount Factor 0.63
PV of Terminal Value $7,757.18 PV of Terminal Value $9,018.02

Distribution of Value Distribution of Value

Period Cash Flow 28% Period Cash Flow 25%
Terminal Cash Flow 72% Terminal Cash Flow 75%
Terminal value 100% Terminal value 100%

Enterprise Value $10,770.26 Enterprise Value $12,031.10

Public comparables
EV Multiples(LTM)
Company Name Enterprise Value Beta (5Y) Debt (%) Equity (%) Debt/Equity Rev. EBITDA EBIT EBITDA Margin EV/Rev EV/EBITDA EV/EBIT
Placement plc $34,171.00 0.81 34.00 64.00 0.53 $16,306.00 $2,781.00 $2,152.00 17.06% 2.1x 12.3x 15.9x
Minicom group inc. 21,300.00 1.25 50.00 42.00 1.19 14,471.00 2,135.00 1,850.00 14.75% 1.5x 10.0x 11.5x
Bauscham group SA 19,234.00 0.56 23.00 76.00 0.30 8,940.00 1,732.00 1,498.00 19.37% 2.2x 11.1x 12.8x
The mater group, inc. 8,198.00 1.81 39.00 49.00 0.80 7,063.00 841.00 684.00 11.91% 1.2x 9.7x 12.0x
Cedant 3,698.00 0.83 40.00 60.00 0.67 2,322.00 376.00 323.00 16.19% 1.6x 9.8x 11.4x
Morris partners, inc. 1,672.00 1.41 108.00 -43.00 -2.51 1,141.00 73.00 34.00 6.40% 1.5x 22.9x 49.2x
Bertel communications 499.00 0.72 17.00 83.00 0.20 482.00 14.00 5.00 2.90% 1.0x 35.6x 99.8x
Milstein saatchii plc 318.00 0.98 7.00 89.00 0.08 264.00 31.00 26.00 11.74% 1.2x 10.3x 12.2x
Constantact, inc. 727.00 1.01 0.00 100.00 0.00 277.00 23.00 5.00 8.30% 2.6x 31.6x 145.4x
Cohart-hankes inc. 512.00 1.28 24.00 76.00 0.32 752.00 80.00 60.00 10.64% 0.7x 6.4x 8.5x
Jaystreet, inc. 335.00 1.83 24.00 76.00 0.32 303.00 31.00 3.00 10.23% 1.1x 10.8x 111.7x
Putwing plc 30.00 0.50 5.00 95.00 0.05 55.00 6.00 2.00 10.91% 0.5x 5.0x 15.0x
Lyris marketing, inc. 19.00 -0.30 14.00 66.00 0.21 35.00 2.00 0.00 5.71% 0.5x 9.5x N/A
Mdia99, Inc 18.00 0.39 13.00 87.00 0.15 3.00 -4.00 -5.00 -133.33% 6.0x -4.5x -3.6x
Bluntly media 93,376.00 1,229.00 1,173.00 1.32%

Company Name Enterprise Value Beta (5Y) Debt (%) Equity (%) Debt/Equity Rev. EBITDA EBIT EBITDA Margin EV/Rev EV/EBITDA EV/EBIT
Placement plc $34,171.00 0.81 34.00 64.00 0.53 $16,306.00 $2,781.00 $2,152.00 17.06% 2.1x 12.3x 15.9x
Minicom group inc. 21,300.00 1.25 50.00 42.00 1.19 14,471.00 2,135.00 1,850.00 14.75% 1.5x 10.0x 11.5x
Bauscham group SA 19,234.00 0.56 23.00 76.00 0.30 8,940.00 1,732.00 1,498.00 19.37% 2.2x 11.1x 12.8x
The mater group, inc. 8,198.00 1.81 39.00 49.00 0.80 7,063.00 841.00 684.00 11.91% 1.2x 9.7x 12.0x
Cedant 3,698.00 0.83 40.00 60.00 0.67 2,322.00 376.00 323.00 16.19% 1.6x 9.8x 11.4x
Milstein saatchii plc 318.00 0.98 7.00 89.00 0.08 264.00 31.00 26.00 11.74% 1.2x 10.3x 12.2x
Cohart-hankes inc. 512.00 1.28 24.00 76.00 0.32 752.00 80.00 60.00 10.64% 0.7x 6.4x 8.5x
Jaystreet, inc. 335.00 1.83 24.00 76.00 0.32 303.00 31.00 3.00 10.23% 1.1x 10.8x 111.7x
Putwing plc 30.00 0.50 5.00 95.00 0.05 55.00 6.00 2.00 10.91% 0.5x 5.0x 15.0x
Median $3,698.00 0.98 24.00 76.00 0.32 $2,322.00 $376.00 $323.00 11.91% 1.2x 10.0x 12.2x
Mean $9,755.11 1.09 27.33 69.67 0.47 $5,608.44 $890.33 $733.11 13.64% 1.3x 9.5x 23.5x

Bluntly Multiple Range Multiple Range EV Range EV Range

2013 Meida (Low) (High) (Low) (High)
Sales $93,376.00 1.0x 1.4x $93,800.44 $131,150.84
EBITDA $1,229.00 9.0x 11.0x $11,032.22 $13,490.22
EBIT $1,173.00 11.2x 13.2x $13,173.69 $15,519.69
Less: Net Debt -$1,744.00
Equity Value $12,776.22 $15,234.22

Precedent transactions
Precedent Transaction Analysis
Announced Date Target's Business Transaction Value EV/Rev EV/EBITDA EV/EBIT
5/3/10 Direct marketing agency $22.20 1.3x 6.3x 7.1x
9/16/03 Direct marketing agency $85.10 2.6x 15.6x 19.4x
2/20/00 Direct marketing agency $1,961.10 2.8x 20.7x 31.2x
7/14/99 Direct marketing for non-profit and fundrasing industry $131.90 1.8x 16.6x 25.8x
5/18/98 Direct marketing agency $160.20 0.8x 5.8x 12.1x
8/12/99 Data and research provider to direct marketing industry $100.30 1.5x 47.6x N/A
6/14/99 Data and research provider to direct marketing industry $1,122.60 21.7x 52.4x 57.6x
5/27/98 Data and research provider to direct marketing industry $814.90 6.7x 22.5x 28.1x
3/13/98 Data and research provider to direct marketing industry $773.20 2.6x 13.8x 36.5x
4/14/97 Data and research provider to direct marketing industry $298.70 4.6x N/A 19.9x
3/22/07 Digital-focused marketing $790.50 1.0x 7.2x 9.5x
12/26/00 Email-focused marketing $112.60 1.5x 8.1x 9.0x
2/28/05 TV/radio advertising and marketing $2.00 4.6x 19.1x 19.3x
Median 2.6x 16.1x 19.7x
Average 4.1x 19.6x 23.0x

Bluntly Multiple Range Multiple Range EV Range EV Range

2013 Meida (Low) (High) (Low) (High)
Sales $93,376.00 2.4x 2.8x $224,102.40 $261,452.80
EBITDA $1,229.00 15.1x 17.1x $18,557.90 $21,015.90
EBIT $1,173.00 18.6x 20.6x $21,866.68 $24,212.68
Less: Net Debt -$1,744.00
Equity Value $20,301.90 $22,759.90

When we use DCF model and perpetuity growth rate of 2% to calculate the enterprise
value, we get enterprise value of $10,770.26. When we use DCF model and EBITDA
multiple (we get EBITDA multiple of 10.0x from comparables) to calculate the enterprise
value, we get enterprise value of $12,031.10. DCF model assumes that the value of the
company equals the present value of all future free cash flows. The model is easy to
use when future cash can be reasonably forecasted. DCF model is usually more
accurate to valuate the intrinsic value. In the public comparable method, we exclude
companies with negative or zero debt/equity ratio and companies with negative net
income or EBITDA margin. We calculate the median and mean of multiples from the list
of comparables. We selected EBITDA multiple of range 9.0x – 11.0x and we got
enterprise value range of $11,032.22 – $13,490.22. Compared with DCF model, public
comparable method is easy to understand and apply. It also has fewer assumptions
used than with DCF model and it better captures current market. However, it’s hard to
find good comparables with identical or similar revenue drives sometimes in public
comparable method and choice of multiples can be subjective.