Comparable Firms:

1) Average P/E Ratio of the Comparable Firms= Harmonic mean of Comparable firm’s P/E ratio
3
= 1 1 1
+ +
24.8 28 18.2

= 22.90
Market Value of Ideko= Average P/E Ratio of the Comparable Firms× Net IncomeIdeko
= 22.90× 6939
=158,903
Market Value of Equity of Ideko= Market Value of Ideko- Debt+ Cash in excess of Working Capital
Need
=158,903 -4500
= 154,403
3
2) Average EV/ Sales Ratio of the Comparable Firms= 1 1 1
+ +
2 2.7 1.5

= 1.95
Target Economic Value of Ideko= 1.95× 75,000
= 146,250
3) If Ideko holds 6.5 million in excess of working capital needs the target equity value of Ideko will be,
Equity Value= Target Economic Value- Debt+ Cash in excess of Working Capital Need
=146,250-4500+6500
= 148,250
3
4) Average EV/ EBITDA Ratio of the Comparable Firms= 1 1 1
+ +
11.6 14.4 9.3

= 11.40
Target Economic Value of Ideko= Average EV/ EBITDA Ratio of the Comparable Firms× EBITDAIdeko
= 11.40× 16,250
= 1,85,250
5) If Ideko holds 6.5 million in excess of working capital needs the target equity value of Ideko will be,
Equity Value= Target Economic Value- Debt+ Cash in excess of Working Capital Need
= 185,250-4500+6500
= 1,87,750
6)
Multiple HighRatio LowRatio HighPrice LowPrice
P/E 28 18.2 194,292 126,290
Market Value of EquityHigh= (194,292-4500)
= 1,89,792
Market Value of EquityLow= (126,290-4500)
= 121,790
7)
Multiple HighRange LowRange
EV/Sales 2.7 1.5

If Ideko holds 6.5 millon extra cash than working capital need then,
Equity ValueHigh= (2.7×75,000)- 4500+ 6500
= 204,500
Equity ValueLow= (1.5×75,000)- 4500+ 6500
= 114,500
8)
Multiple HighRange LowRange
EV/EBITDA 14.4 9.3

If Ideko holds 6.5 millon extra cash than working capital need then,
Equity ValueHigh= (14.4×16,250)- 4500+ 6500
= 236,000
Equity ValueLow= (9.3×16,250)- 4500+ 6500
= 153,125

Planned Debt:

Year Amount of Debt Interest Expense (6.8%)

2008 115,000 7,820
2009 120,000 8,160

Sales & Operating Cost Assumptions:

 Year Market Size(MS) Market Share(MC) Required Production
Rate(MS×MC)
2007 11,025 12% 1323
2008 11,576 13% 1505
2009 12,155 14% 1702

Account Receivable Days:

Account Receivable
Account Receivable Days= Sales Revenue
× 365days
18,493
=75,000 × 365days

= 90days
Interest Expense and free cash flow:
1) After Tax Interest Expense2008= Pretax Interest Expense2008× (1-T)
= 6800× (1- .35)
= 4,420
Here, Tax Rate= Income Tax÷ Pretax Income
= 3736÷ 10675
= 35%
2) FCF2008,
Particulars Amount
Net Income 6,960
(+)After Tax Interest Expense 4,420
Unlevered Net Income 11,380
(+) Depreciation 6,865
(-) Increase in NWC (3,250)
(-) Capital Expenditures (20,000)
Free Cash Flow of Firm (5,005)

3) FCF to the Equity2008

Particulars Amount
Free Cash Flow of the Firm (5,005)
(+) Net Borrowing 15,000
(-) After Tax Interest Expense (4,420)
Free Cash Flow to the Equity 5,575

4) After Tax Interest Expense2010= Pretax Interest Expense2010× (1-T)

= 8,160× (1- .35)
= 5,304
5) FCF to the Firm2010
Particulars Amount
Net Income 10,545
(+)After Tax Interest Expense 5,304
Unlevered Net Income 15,849
(+) Depreciation 7,710
(-) Increase in NWC (4,000)
(-) Capital Expenditures (8,000)
Free Cash Flow of Firm 11,559

6) FCF to the Equity2010

Particulars Amount
Free Cash Flow of the Firm 11,559
(+) Net Borrowing 0
(-) After Tax Interest Expense (5,304)
Free Cash Flow to the Equity 6,255

7)- 14) done in the question

15) FCF to the Firm2007 & FCF to the Equity2007,
Particulars Amount
Net Income 6,247
(+) After Tax Interest Expense 4,420
Unlevered Net Income 10,667
(+) Depreciation 5,405
(-) Increase in NWC (3,000)
(-) Capital Expenditure (5,000)
Free Cash Flow of the Firm 8,072
(-) After Tax Interest Expense (4,420)
Free Cash Flow to the Shareholders 3,652

16) FCF to the Firm2009 & FCF to the Equity2009,

Particulars Amount
Net Income 8,382
(+) After Tax Interest Expense 5,083
Unlevered Net Income 13,465
(+) Depreciation 7,678
(-) Increase in NWC (3,600)
(-) Capital Expenditure (15,000)
Free Cash Flow of the Firm 2,543
(-) After Tax Interest Expense (5,083)
Net Borrowing 5,000
Free Cash Flow to the Shareholders 2,460

Capital Structure and Unlevered Beta Estimates for Comparable Firms:

 𝐸 𝐷
1) Unlevered Beta for Oakley, ßU= 𝐸+𝐷 × ße+ 𝐷+𝐸 × ßd

= (1× 1.50)+ 0
= 1.50
2) Oakley’s Cost of Capital Using CAPM Model,
RU= RF+ (RM- RF)× ßU ; Here, R= Risk Free Return,
= 6%+ 5%× 1.50 (RM- RF)= Market Risk Premium
= 13.5% ßU= Unlevered Beta of Oakley
𝐸 𝐷
3) Unlevered Beta for Luxottica, ßU= 𝐸+𝐷 × ße+ 𝐷+𝐸 × ßd

= (.83× .75)+ (.17× 0)

= .62
4) Luxottica’s Cost of Capital Using CAPM Model,
RU= RF+ (RM- RF)× ßU
= 6%+ 5%× .62
= 9.1%
𝐸 𝐷
5) Unlevered Beta for Nike, ßU= 𝐸+𝐷 × ße + 𝐷+𝐸 × ßd

= (1.05× .60)× (-.05×0)

= .63
6) Nike’s Cost of Capital Using CAPM Model,
RU= RF+ (RM- RF)× ßU
= 6%+ 5%× .63
= 9.15%

Future Growth Calculation:

1) If future expected growth rate, g= 5% then,
FCF2011= Unlevered FCF2011 + Depreciation2011 – Increase in NWC2011+ Capital Investment2011
=Unlevered FCF2010× (1+g) + Capital Expenditure2011 × 10% – NWC2010× g + Capital
Expenditure2010× g.
Now, Unlevered FCF2011= Unlevered FCF2010× (1+g)
= 15,849× 1.05
 = 16,641.45
Capital Expenditure2011= Capital Expenditure2010× (1+ g)
= 69,392 × 1.05
= 72,861.6
Depreciation2011= Capital Expenditure2011× 10% [As previously the percentage was 10%]
= 7,286.16
NWC2011= NWC2010× g
= (50,872- 10,448) × .05
=2021.2
FCF2011 considering 5% growth rate,
Particulars Amount
Unlevered Net Income 16,641.45
(+) Depreciation 7,286.16
(-) Increase in NWC (2,021.2)
(-) Capital Expenditure (3,469.6)
Free Cash Flow of the Firm 18,436.81

2) Continuation Value or Enterprise value of 2010 using discounted cash flows with 5% constant growth
and 9% WACC will be,
FCF2011
Enterprise Value2010= WACC−g

18,436.81
= 9%−5%

= 460,920.25
3) If EBITDA2010 multiple is 8.5 then,
Continuation Enterprise Value2010= EBITDA multiple × EBITDA2010
= 8.5 × 32,094
= 272,799
4) If EBITDA2010 multiple is 8.5 then,
Continuation Equity Value2010= Continuation Enterprise Value2010- Debt2010
= 272,799- 120,000
= 152,799
5) If EBITDA2010 multiple is 9.4 then,
Continuation Enterprise Value2010= EBITDA multiple × EBITDA2010
 = 9.4 × 32,094
= 301,683.6

6) If EBITDA2010 multiple is 9.4 then,

Continuation Equity Value2010= Continuation Enterprise Value2010- Debt2010
= 301,683.6- 120,000
= 181,683.6

7) If EBITDA2010 multiple is 8.5 then,

Continuation Enterprise Value2010= 272,799
Continuation Enterprise Value2010
EV/Sales=
Sales2010
272,799
=
158,526

= 1.72
8) If EBITDA2010 multiple is 9.4 then,
Continuation Enterprise Value2010= 301,683.6
Continuation Enterprise Value2010
EV/Sales= Sales2010
301,683.6
= 158,526

= 1.90
9) If EBITDA2010 multiple is 8.5 then,
Continuation Enterprise Value2010= 272,799
Continuation Enterprise Value2010
Unlevered P/E Ratio=
Unlevered Income2010
2,72,799
= 15,849

= 17.212
10) If EBITDA2010 multiple is 9.4 then,
Continuation Enterprise Value2010= 301,683.6
Continuation Enterprise Value2010
Unlevered P/E Ratio= Unlevered Income2010
301,683.6
= 15,849
 = 19.034
11) If EBITDA2010 multiple is 8.5 then,
Continuation Equity Value2010= 152,799
Continuation Equity Value2010
Levered P/E Ratio= Net Income2010
; [ As net income is tax deducted]
152,799
= 10,545

=14.49
12) If EBITDA2010 multiple is 9.4 then,
Continuation Equity Value2010= 152,799
Continuation Equity Value2010
Levered P/E Ratio= Net Income2010
181,683
= 10545

= 17.229