University of Dhaka

Faculty of Business Studies

Department of Accounting & Information Systems
BBA Program
Investment Analysis and Portfolio Management (4203)
An Assignment on the Valuation
Submitted To:
Professor Md. Maksudur Rahman Sarker

Submitted by
Section A Group 1

Name Roll
Jubayer Hasan 23-001
Shumayara Chowdhury 23-079
Yeasin Arafat 23-089
Tama Lika Khasnobish 23-114
Md Kamal Hossain 23-148
Mim Nadira 23-164
Amit Chandra Das 23-167
Probir Karmaker 23-185
Arefa Siddiqua Jame 23-190
Nayeem Mohammad Sakib 23-210

Date of submission: 17 October, 2020

 Valuation and Financial Modeling: A Case Study

Use the tables for the question(s) below.

Estimated 2005 Income Statement and Balance Sheet Data for Ideko Corporation
Year 2005 Year 2005
Income Statement ($ 000) Balance Sheet ($ 000)
1 Sales 75,000 Assets
2 Cost of Goods Sold 1 Cash and Equivalents 12,664
3 Raw Materials (16,000) 2 Accounts Receivable 18,493
4 Direct Labor Costs (18,000) 3 Inventories 6,165
5 Gross Profit 41,000 4 Total Current Assets 37,322
6 Sales and Marketing (11,250) 5 Property, Plant, and Equipment 49,500
7 Administrative (13,500) 6 Goodwill ---
8 EBITDA 16,250 7 Total Assets 86,822
9 Depreciation (5,500) Liabilities and Stockholder's Equity
10 EBIT 10,750 8 Accounts Payable 4,654
11 Interest Expense (net) (75) 9 Debt 4,500
12 Pre-tax Income 10,675 10 Total Liabilities 9,154
13 Income Tax (3,736) 11 Stockholder's Equity 77,668
14 Net Income 6,939 12 Total Liabilities and Equity 86,822

The following are financial ratios for three comparable companies:

Ratio Oakley, Inc. Luxottica Group Nike, Inc.
P/E 24.8x 28x 18.2x
EV/Sales 2x 2.7x 1.5x
EV/EBITDA 11.6x 14.4x 9.3x
EBITDA/Sales 17.0% 18.5% 15.9

1) Based upon the average P/E ratio of the comparable firms, Ideko's target market value of
equity is closest to:
Ans: Here are the P/E ratios of three companies-
Oakley- 24.8 times
Luxottica- 28 times
Nike- 18.2 times
Average P/E ratios of three companies= (24.8+28+18.2)/3 =23.67 times
Target MV of equity(Price) = Earning × average P/E ratios
= 6.939 million × 23.67
= $ 164.22 million

2) Based upon the average EV/Sales ratio of the comparable firms, Ideko's target economic value is
closest to:
Ans: Average EV/Sales = (2.0+2.7+1.5) /3= 2.07
Target EV = Avg. EV/Sales × Sales
= 2.07 × $75 million
= $155.25
3) Based upon the average EV/Sales ratio of the comparable firms, if Ideko holds $6.5 million of
cash in excess of its working capital needs, then Ideko's target market value of equity is closest to:
Ans: Average EV/Sales = (2.0+2.7+1.5) /3
= 2.07 times
Target EV = Avg. EV/Sales × Sales
= 2.07 × $75 million
= $155.25
We know that,
Enterprise Value( EV) = Equity + Debt - Cash in excess of NWC needs
MV of Equity = EV - Debt + cash in excess of NWC needs
= $155.25 - $4.5 + $6.5
= $157.25 million

4) Based upon the average EV/EBITDA ratio of the comparable firms, Ideko's target economic
value is closest to:
Ans: Here are the Economic Value(EV)/Earning Before Interest Tax Depreciation(EBITDA) ratios of
three companies-
Oakley- 11.6 times
Luxottica- 14.4 times
Nike- 9.3 times
Average EV/EBITDA = (11.6+14.4+9.3)/3
= 11.77 times
Target Economic Value(EV) = Avg. EV/EBITDA × EBITDA
= 11.77 × $16.25 million
= $191.26 million

5) Based upon the average EV/EBITDA ratio of the comparable firms, if Ideko holds $6.5 million
of cash in excess of its working capital needs, then Ideko's target market value of equity is closest
to:
Ans: Here are the Economic Value(EV)/Earning Before Interest Tax Depreciation(EBITDA) ratios of
three companies-
Oakley- 11.6 times
Luxottica- 14.4 times
Nike- 9.3 times
Average EV/EBITDA = (11.6+14.4+9.3)/3
= 11.77 times
Target Economic Value(EV) = Avg. EV/EBITDA × EBITDA
= 11.77 × $16.25 million
= $191.26 million
We know that,
Enterprise Value( EV) = Equity + Debt - Cash in excess of NWC needs
MV of Equity = EV - Debt + cash in excess of NWC needs
= $191.26- $4.5 + $6.5
= $193.26 million
6) What range for the market value of equity for Ideko is implied by the range of P/E multiples
for the comparable firms?
Ans: The lowest Price Earning(P/E) among the three companies is P/E of Nike = 18.2
Lowest MV of Equity = Earnings(Net Income) × P/E ratio(Nike)
= $6.939 million × 18.2
= $126.29 million
The highest Price Earning(P/E) among the three companies is P/E of Luxottica Group= 28.0
Highest MV of Equity = Earnings(Net Income) × P/E ratio(Luxottica)
= $6.939 million × 28.0
= $194.29 million

7) What range for the market value of equity for Ideko is implied by the range of EV/Sales multiples
for the comparable firms if Ideko holds $6.5 million of cash in excess of its working capital needs?
Ans: Low
EV/Sales (Nike) = 1.5
EV = 75million * 1.5
= 112.5million
EV= Equity + Debt - Cash in excess of NWC needs
Or, Equity = EV - Debt+ Cash in excess of NWC needs
=112.5 – 4.5 + 6.5
=114.5
High
EV/Sales(Luxoticca)= 2.7
EV= 75mil* 2.7
=202.5mil
EV=Equity + Debt – Cash in hand of NWC needs
Or,Equity = EV – Debt + Cash in hand of NWC needs
= 202.5-4.5+6.5
= 204.5
Range = (114.5 to 204.5)

8) What range for the market value of equity for Ideko is implied by the range of EV/EBITDA
multiples for the comparable firms if Ideko holds $6.5 million of cash in excess of its working capital
needs?
Ans: Low
EV/EBITDA (Nike) =9.3
EV = $16.25 million ×9.3 = $151.13 million
EV= Equity + Debt - Cash in excess of NWC needs
Low Equity Price=EV- Debt + cash in excess of NWC needs
= $151.13 - $4.5 +$6.5
= $153.13 million
High
EV/EBITDA(Luxottica) = 14.4
EV= $16.25 million ×14.4 = $234.00 million
High
EV= Equity + Debt - Cash in excess of NWC needs
High Equity Price = EV- Debt +cash in excess of NWC needs
= $234.00 -$4.5+$6.5
=$236.00 million
Range = (153.13 to 236)
Use the following information to answer the question(s) below:

Ideko's Planned Debt

Year 2005 2006 2007 2008 2009 2010
Outstanding Debt 100,000 100,000 100,000 115,000 120,000 120,000

1) If Ideko's loans will have an interest rate of 6.8%, then the interest expense paid in 2008 is closest
to:
Ans: Interest = Interest rate ×ending balance
= .068 ×100,000
= $6,800

2) If Ideko's loans will have an interest rate of 6.8%, then the interest expense paid in 2009 is closest
to:
Ans: Interest = Interest rate ×ending balance
= .068 ×115,000
= $7,820

Use the table for the question(s) below.

Ideko Sales and Operating Cost Assumptions
Year 2005 2006 2007 2008 2009 2010
Sales Data Growth/Year
1 Market Size (000 units) 5.0% 10,000 10,500 11,025 11,576 12,155 12,763
2 Market Share 1.0% 10.0% 11.0% 12.0% 13.0% 14.0% 15.0%
3 Average Sales Price
($/unit) 2.0% 75.00 76.50 78.03 79.59 81.18 82.81
Cost of Goods Data
4 Raw Materials ($/unit) 1.0% 16.00 16.16 16.32 16.48 16.65 16.82
5 Direct Labor Costs
($/unit) 4.0% 18.00 18.72 19.47 20.25 21.06 21.90
Operating Expense
and Tax Data
6 Sales and Marketing
(% sales) 15.0% 16.5% 18.0% 19.5% 20.0% 20.0%
7 Administrative (% sales) 18.0% 15.0% 15.0% 14.0% 13.0% 13.0%
8 Tax Rate 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%

3) Based upon Ideko's Sales and Operating Cost Assumptions, what production capacity will Ideko
require in 2007?
Ans: Production volume each year can be estimated by multiplying the total market
Size and Ideko's market share from the table above:
In 2007 Ideko’s requires =11025*.12
=1323 units

4) Based upon Ideko's Sales and Operating Cost Assumptions, what production capacity will Ideko
require in 2008?
Ans: Production capacity = 2008 Market share x 2008 Market size
= 13% x 11576
= 1505
5) Based upon Ideko's Sales and Operating Cost Assumptions, what production capacity will Ideko
require in 2009?
Ans: Production capacity = 2009 Market share x 2009 Market size
= 14% x 12155
=1701

Year 2005 Year 2005

Income Statement ($ 000) Balance Sheet ($ 000)
1 Sales 75,000 Assets
2 Cost of Goods Sold 1 Cash and Equivalents 12,664
3 Raw Materials (16,000) 2 Accounts Receivable 18,493
4 Direct Labor Costs (18,000) 3 Inventories 6,165
5 Gross Profit 41,000 4 Total Current Assets 37,322
6 Sales and Marketing (11,250) 5 Property, Plant, and Equipment 49,500
7 Administrative (13,500) 6 Goodwill ---
8 EBITDA 16,250 7 Total Assets 86,822
9 Depreciation (5,500) Liabilities and Stockholder's Equity
10 EBIT 10,750 8 Accounts Payable 4,654
11 Interest Expense (net) (75) 9 Debt 4,500
12 Pre-tax Income 10,675 10 Total Liabilities 9,154
13 Income Tax (3,736) 11 Stockholder's Equity 77,668
14 Net Income 6,939 12 Total Liabilities and Equity 86,822

6) Calculate Ideko's Accounts Receivable Days.

Ans: Ideko’s account receivable day is closest to: 90 days
Breakdown: (Account receivable/Sales) x 365 = (18493/75000) x 365 = 90
Estimated 2005 Income Statement and Balance Sheet Data for Ideko Corporation

Use the following information to answer the question(s) below

1) The after tax interest expense in 2008 is closest to:

Ans: After tax expense= Interest Expense x (1-Tc)
= 6800 x (1-0.35)
= 4420

2) The free cash flow to the firm in 2008 is closest to:

Ans: Free cashflow= Net Income + After Tax Interest + Depreciation – Change in Working capital
- Capital expenditure
= 6960 + 4420 + 6865 - 3250 – 20000
= -5005
3) The free cash flow to equity in 2008 is closest to:
Ans: Free Cashflow to equity = Free Cashflow + Net Borrowing – After Tax Interest Expense
= -5005 + 15000 – 4420
= 5575

4) The after tax interest expense in 2010 is closest to what?

Ans: After-tax interest expense = Interest Expense (1-Tc)
= 8160 (1-0.35)
= 5304

5) The free cash flow to the firm in 2010 is closest to:

Ans: Free Cash flow= Net Income + After Tax interest expense + Depreciation – Changes in net working
Capital – Capital expenditure
= 10545 + 5304 + 15848 – 7710 – 8000
= 11599
6) The free cash flow to equity in 2010 is closest to:
Ans: Free cash flow to equity = Free cash flow + net borrowing – after tax interest expense
= 11559 + 0 – 5304= 6255

Year 2005 2006 2007 2008 2009 2010

Working Capital ($ 000)
Assets
1 Accounts Receivable 18,493 14,525 16,970 19,689 22,709 26,059
2 Raw Materials 1,973 1,534 1,775 2,039 2,329 2,646
3 Finished Goods 4,192 4,967 5,838 6,815 7,911 9,138
4 Minimum Cash Balance 6,164 7,262 8,485 9,845 11,355 13,030
5 Total Current Assets 30,822 28,288 33,067 38,388 44,304 50,872
Liabilities
6 Wages Payable 1,294 1,433 1,695 1,941 2,211 2,570
7 Other Accounts Payable 3,360 4,099 4,953 5,938 6,900 7,878
8 Total Current Liabilities 4,654 5,532 6,648 7,879 9,110 10,448
Net Working Capital
9 Net Working Capital (5 -8) 26,168 22,756 26,419 30,509 35,194 40,425
10 Increase in Net Working
Capital (3,412) 3,663 4,089 4,685 5,231

7) With the proper changes it is believed that Ideko's credit policies will allow for an account
receivables days of 60. The forecasted accounts receivable for Ideko in 2006 is closest to:
Ans: Account receivable = (Annual sales/ 365)* 60 days
= (88358/365)*60
= 14525

8) With the proper changes it is believed that Ideko's credit policies will allow for an account
receivables days of 60. The forecasted accounts receivable for Ideko in 2007 is closest to:
Ans: Account receivable = (Annual sales/ 365)* 60 days
= (103234/365)*60
= 16970
9) With the proper changes it is believed that Ideko's credit policies will allow for an account
receivables days of 60. The forecasted accounts receivable for Ideko in 2008 is closest to:
Ans: Account receivable = (Annual sales/ 365)* 60 days
= (119777/365)*60
= 19690

10) The amount of net working capital for Ideko in 2006 is closest to:
Ans: Net working capital = Current Asset – Current liability
= 28288 – 5532
= 22756

11) The amount of net working capital for Ideko in 2007 is closest to:
Ans: Net working capital = Current Asset – Current liability
= 33067 – 6648
= 26419

12) The amount of net working capital for Ideko in 2008 is closest to:
Ans: Net working capital = Current Asset – Current liability
= 38388 – 7879
= 30509
13) The amount of the increase in net working capital for Ideko in 2007 is closest to:
Ans: Increase In net working capital = NWC2007 - NWC2006
= 26419 – 22756
= 3663
14) The amount of the increase in net working capital for Ideko in 2008 is closest to:
Ans: Increase In net working capital = NWC2008 - NWC2007
= 30509 – 26419
= 4089

15) Using the income statement above and the following information:

Year 2006 2007 2008 2009 2010

Increases in NWC 2,250 3,000 3,250 3,600 4,000
Capital Expenditures 5,000 5,000 20,000 15,000 8,000
Net Borrowing 0 0 15,000 5,000 0

Calculate Ideko's Free Cash Flow to the Firm and Free Cash Flow to Equity in 2007.
Ans: Free Cash flow = Net income + After income tax Expense + Depreciation – Change in working
Capital – capital expenditure
= 6247 + 4420+ 5405- 3000- 5000
= 8072

16) Calculate Ideko's Free Cash Flow to the Firm and Free Cash Flow to Equity in 2009.
Ans: Free Cash Flow = Net Income + After tax interest expense + depreciation – Increase in NWC –
Capital Expenditure
= 8382 + 5083 + 7678 – 3600 – 15000
= 2543
Free Cash flow to equity = Free cash flow + Net Borrowing – After tax interest expense
= 2543 + 5000 – 5083
= 2460
Use the table for the question(s) below.

Capital Structure and Unlevered Beta Estimates for Comparable Firms

Firm E D U
Oakley 1.00 0.00 1.50 -------- 1.50
Luxottica 0.83 0.17 0.75 0 0.62
Nike 1.05 -0.05 0.60 0 0.63

1) The unlevered beta for Oakley is closest to?

Ans: The unlevered beta for Oakley is:

βU = βE +
=(1*1.50) +(0*0)
=1.50

2) If the risk-free rate of interest is 6% and the market risk premium has historically averaged 5%,
then the cost of capital for Oakley is closest to?
Ans: Here, Risk free rate Rf=.06,
Market risk premium Rp=.05
Rwacc=Risk free rate+(Market risk premium*βU)
=.06+(.05*1.5)
=13.5%

3) The unlevered beta for Luxottica is closest to?

Ans: The unlevered beta for Luxottica:
βu = (Equity/Enterprise Value)βE + (Net Debt Value/Enterprise value)βD
=(0.83*0.75) +( 0.17*0)
=0.62

4)If risk-free rate of interest rate is 6% and the market risk premium is has historically averaged
5%, then the cost of capital for Luxottica is closest to what?
Ans: The cost of capital for Luxottica:
Here, Rf=0.06, Rp=.05, β(Luxottica)=0.62
Rwacc=0.06+(.05*.62)
=9.1%

5) The unlevered beta for Nike is closest to:

Ans:
The unlevered beta for Nike:
βu= βE + βD
=(1.05*.60)+(-.05*0)
=0.63
6) If the risk-free rate of interest is 6% and the market risk premium has historically averaged 5%,
then the cost of capital for Nike is closest to:
Ans: U=(Equity Value/Enterprise Value)* E + (Net Debt Value/ Enterprise Value)* D
= 1.05(.60) + -0.05(0)
= 0.63
NikeWACC= rf + (rm-rf)* U
= 0.06 + 0.63(0.05)
=0.0915 or 9.15%
1) If Ideko's future expected growth rate is 5%, then the estimated free cash flow for 2011 is closest
to:
Ans: Tc= income tax for 2010 /pre tax income for 2010
= 5,678/16,223= 35%
After- tax interest expense= interest expense(1-Tc)
= 8,160(1-.35)
= 5,304 ( for year 2010)
Unlevered Net Income= net income+ after tax interest expense
= 10,545+5,304
= 15,849.
NWC = Current assst- Current liabilities
=50,872-10,448
=40,424.
FCF = (1+g)* Unlevered Net income- g× NWC -g*Fixed asset
= (1+.05)*15,849-.05*40,424-.05*69,392=11,150.65.

2) If Ideko's future expected growth rate is 5% and its WACC is 9%, then the continuation value in
2010 is closest to:
Ans: From 1, we get,
Free cash flow for 2011 = 11,150.65
VL2010 = FCF2011 /(WACC -g)
= 11,150.65\(.09-.05)
= 278,766.25

3) Assuming that Ideko has a EBITDA multiple of 8.5, then the continuation enterprise value of
Ideko in 2010 is closest to:
Ans: Continuation Enterprise Value =EBITDA*EBITDA Multiple
=32.094*8.5
=272.8 million

4) Assuming that Ideko has a EBITDA multiple of 8.5, then the continuation equity value of Ideko
in 2010 is closest to what?
Ans: Continuation Enterprises Value = EBITDA × 8.5
= $32,094×8.5
= $272.8 m.
Continuation of Equity Value = Continuation EV – Debt
= $272.8 - $120
= $152.8 m.

5) Assuming that Ideko has a EBITDA multiple of 9.4, then the continuation enterprise value of
Ideko in 2010 is closest to what?
Ans: Continuation EV = EBITDA × EBITDA Multiple
= $32,094 ×9.4
= $301.7 m.

6) Assuming that Ideko has a EBITDA multiple of 9.4, then the continuation equity value of Ideko
in 2010 is closest to what?
Ans: From 5, Continuation of Enterprise value $301.7 m
Continuation of Equity value = Enterprise value – Debt
= $301.7 – 120
= $181.7 m
7) Assuming that Ideko has a EBITDA multiple of 8.5, then the continuation EV/Sales ratio of Ideko
in 2010 is closest to what?
Ans: Continuation of EV = $32.094 × 8.5
= $272.8 m
EV/ Sales ratio = $272.8m / $158.526
= 1.72

8) Assuming that Ideko has a EBITDA multiple of 9.4, then the continuation EV/Sales ratio of Ideko
in 2010 is closest to:
Ans: Continuation Enterprise Value = EBITDA * EBITDA Multiple
= 32.094* 9.4
= $ 301.7 million.
Sales amount = $ 158.526
EV/SALES Ratio = Enterprise value / Sales
= $ 301.7 m/ $158.526
= 1.90

9) Assuming that Ideko has a EBITDA multiple of 8.5, then the continuation unlevered P/E ratio of
Ideko in 2010 is closest to:
Ans: Continuation Enterprise Value = EBITDA * EBITDA Multiple
= 32.094 * 8.5
= $ 272.8 million.
Unlevered Net Income = Net Income + After tax interest expense
= 10.545+ 8.160 (1- 0.35)
= $15.849
Unlevered P/E Ratio = Enterprise Value / Unlevered Net Income
= $272.8m / $15.849
= 17.21

10) Assuming that Ideko has a EBITDA multiple of 9.4, then the continuation unlevered P/E ratio of
Ideko in 2010 is closest to:
Ans: Continuation Enterprise Value = EBITDA * EBITDA Multiple
= 32.094 * 9.4
= $301.7 million.
Unlevered Net Income = Net Income + After tax interest expense
= 10.545 + 8.160(1- 0.35)
= 15.849
Unlevered P/E Ratio = Enterprise Value / Unlevered Net Income
= $301.7/ $15.849
= 19.02
11) Assuming that Ideko has a EBITDA multiple of 8.5, then the continuation levered P/E ratio of
Ideko in 2010 is closest to:
Ans: Continuation Enterprise Value = EBITDA * EBITDA Multiple
= 32.094 * 8.5
= $272.8 million.
Continuation Equity Value = Continuation Enterprise Value – Debt
= $272.8 - $120
= $152.8 million.
Levered P/E Ratio = Equity Value/ levered net income
= $152.8/ 10.545
= 14.5

12) Assuming that Ideko has a EBITDA multiple of 9.4, then the continuation levered P/E ratio of
Ideko in 2010 is closest to:
Ans: Continuation Enterprise Value = EBITDA * EBITDA Multiple
= 32.094 * 9.4
= $301.7 million.
Continuation Equity Value = continuation Enterprise Value – Debt
= $301.7 - $120
= $181.7 million.
Levered P/E Ratio = Equity Value/ levered net income
= $181.7/$10.545
= 17.2