公司理财（英文版·第5版）课件 第19章　估值与财务建模：案例分析

CorporateFinanceFifthEditionChapter19ValuationandFinancialModeling:ACaseStudyCopyright©2020,2017,2014PearsonEducation,Inc.

AllRightsReservedChapterOutline19.1ValuationUsingComparables19.2TheBusinessPlan19.3BuildingtheFinancialModel19.4

EstimatingtheCostofCapital19.5ValuingtheInvestment19.6

SensitivityAnalysisLearningObjectives(1of3)Describetheuseofcomparablesasapreliminarywaytoestimatefirmvalue.Identifytheprimaryfactorstoconsiderwhenestimatingthefirm’sfuturecashflows.Describetheuseofafinancialmodelinprojectingfuturecashflowsfromaninvestment.LearningObjectives(2of3)UsetheC

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Mtoestimatetheequitycostofcapitalforaproposedproject,usingbetasofcomparablefirms.Useavaluationmultipletoestimatethecontinuationvalueforafirmoraproject.Usethediscountedcashflowmethodtoestimateacontinuationvalueforafirmoraproject.UsethevaluationmethodsdescribedinChapter18tocalculatefirmvalue.LearningObjectives(3of3)DiscusstheuseofI

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Randcashmultiplesasalternativevaluationmetrics,anddiscussthedrawbacksofthosemethods.CalculateI

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Randcashmultiplesforagivenfirmorproject.Describetheuseofsensitivityanalysisinevaluatingtheuncertaintyofthevalueofthedeal.19.1ValuationUsingComparables(1of2)ConsiderIdekoCorporation,aprivatelyheldfirm.Theownerhasdecidedtosellthebusiness.Yourjob,asapartnerinK

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PInvestments,istoevaluatepurchasingthecompany,implementingoperationalandfinancialimprovements,andsellingthebusinessattheendoffiveyears.Table19.1EstimatedIncomeStatementandBalanceSheetDataforIdekoCorporationTable19.2IdekoFinancialRatiosComparison,Mid-2005RatioIdeko(Proposed)Oakley,Inc.LuxotticaGroupNike,Inc.SportingGoodsIndustrystartfractionPoverEendfraction21.6times.24.8times.28.0times.18.2times.20.3times.startfractionEVoverSalesendfraction2.0times.2.0times.2.7times.1.5times.1.4times.startfractionEVoverEBITDAendfraction9.1times.11.6times.14.4times.9.3times.11.4times.startfractionEBITDAoverSalesendfraction21.7%17.0%18.5%15.9%12.1%19.1ValuationUsingComparables(2of2)Apriceof$150millionforIdeko’sequityhasbeensuggested.Thedatainthepreviousslideprovidessomereassurancethattheacquisitionpriceof$150millionisreasonableastheratiosareaboutthesameorbetterthantheindustryaverages.However,toassesswhetherthisinvestmentisattractive,theoperationalaspectsofthefirmandoftheultimatecashflowsthedealisexpectedtogenerateneedtobeanalyzed.TextbookExample19.1(1of2)ValuationbyComparablesProblemWhatrangeofacquisitionpricesforIdekoisimpliedbytherangeofmultiplesforinTable19.2?TextbookExample19.1(2of2)SolutionForeachmultiple,wecanfindthehighestandlowestvaluesacrossallthreefirmsandtheindustryportfolio.ApplyingeachmultipletothedataforIdekoinTable19.1yieldsthefollowingresults:Forexample,Nikehasthelowestmultipleof18.2.MultiplyingthisbyIdeko’searningsof$6.94milliongivesavalueofThehighestmultipleofenterprisevaluetosalesis2.7(Luxottica);atthismultiple,Ideko’senterprisevalueisAddingIdeko’sexcesscashandsubtractingitsdebtimpliesapurchasepriceofThetableabovedemonstratesthatwhilecomparablesprovideausefulbenchmark,theycannotberelieduponforapreciseestimateofvalue.AlternativeExample19.1(1of2)ProblemBuyMore,Inc.(BMR)hasanEnterpriseValueof$18.7billion.BMR’sEnterpriseValuetoSalesratiois0.40versus1.65forpeers,whiletheirEnterpriseValuetoEBITDAratiois6.5versus15.7forpeers.HowwouldBMR’sEnterpriseValuechangeiftheratioswereequaltotheaveragefortheirpeers?AlternativeExample19.1(2of2)SolutionUsingtheEnterpriseValuetoSalesratio,B

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’sEnterpriseValuewouldbeUsingtheEnterpriseValuetoE

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’sEnterpriseValuewouldbeIsBuyMoreunderpricedoraretheirpeersoverpriced?19.2TheBusinessPlan(1of3)OperationalImprovementsBycuttingadministrativecostsimmediatelyandredirectingresourcestonewproductdevelopment,sales,andmarketing,youbelieveIdekocanincreaseitsmarketsharefrom10%to15%overthenextfiveyears.19.2TheBusinessPlan(2of3)OperationalImprovementsTheincreasedsalesdemandcanbemetintheshortrunusingtheexistingproductionlines.Oncethegrowthinvolumeexceeds50%,however,Idekowillneedtoundertakeamajorexpansiontoincreaseitsmanufacturingcapacity.19.2TheBusinessPlan(3of3)OperationalImprovementsIdeko’saveragesellingpriceisforecasttoincrease2%eachyear.Rawmaterialsareforecasttoincreaseata1%rate.Laborcostsareforecasttoincreaseata4%rate.Table19.3IdekoSalesandOperatingCostAssumptionsTextbookExample19.2(1of2)ProductionCapacityRequirementsProblemBasedonthedatainTable19.3,whatproductioncapacitywillIdekorequireeachyear?Whenwillanexpansionbenecessary?TextbookExample19.2(2of2)SolutionProductionvolumeeachyearcanbeestimatedbymultiplyingthetotalmarketsizeandIdeko’smarketshareinTable19.3:Basedonthisforecast,productionvolumewillexceeditscurrentlevelby50%by2008,necessitatinganexpansionthen.AlternativeExample19.2(1of2)ProblemWilkersonInc.believesthatitcanincreaseitsshareofthewidgetmarketby2%peryear.Blank20192020202120222023MarketSize(000units)25,00026,50028,09029,77531,562MarketShare7%9%11%13%15%IfWilkersoncurrentlyhasthecapacitytomanufacture3.5millionwidgetsayear,whenwillanexpansionbecomenecessary?AlternativeExample19.2(2of2)SolutionProductionvolumeeachyearisestimatedasMarketBlank20192020202120222023MarketSize(000units)25,00026,50028,09029,77531,562MarketShare7%9%11%13%15%ProductionVolume(000units)1,7502,3853,0903,8714,734Basedonthisforecast,anexpansioninproductioncapacitywillbeneededin2022.CapitalExpenditures:ANeededExpansionIn2008,amajorexpansionwillbenecessaryforIdeko,leadingtoalargeincreaseincapitalexpendituresin2008and2009.Table19.4IdekoCapitalExpenditureAssumptionsWorkingCapitalManagement(1of2)Ideko’sAccountsReceivableDaysisWhiletheindustryaverageis60daysYoubelievethatIdekocantightenitscreditpolicytoachievetheindustryaveragewithoutsacrificingsales.WorkingCapitalManagement(2of2)Ideko’sinventoryfigureonitsbalancesheetincludes$2millionofrawmaterials.Givenrawmaterialexpendituresof$16millionfortheyear,Idekocurrentlyholds45.6daysworthofrawmaterialinventory.Youbelievethat,withtightercontrolsoftheproductionprocess,30daysworthofinventorywillbeadequate.CapitalStructureChanges:LeveringUp(1of3)YoubelieveIdekoissignificantlyunderleveragedsoyouplantoincreasethefirm’sdebt.Thedebtwillhaveaninterestrateof6.8%,andIdekowillonlypayinterestduringthenextfiveyears.Thefirmwillseekadditionalfinancingin2008and2009associatedwiththeexpansion.CapitalStructureChanges:LeveringUp(2of3)Theforecastedinterestexpenseeachyeariscomputedasfollows:Table19.5Ideko’sPlannedDebtandInterestPaymentsCapitalStructureChanges:LeveringUp

(3of3)Inadditiontothe$150millionpurchasepriceforIdeko’sequity,$4.5millionwillbeusedtorepayIdeko’sexistingdebt.With$5millionintransactionfees,theacquisitionwillrequire$159.5millionintotalfunds.K

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P’ssourcesoffundsincludethenewloanof$100millionaswellasIdeko’sownexcesscash(whichK

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Pwillhaveaccessto).ThusK

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’srequiredequitycontributiontothetransactionis$53million.Table19.6SourcesandUsesofFundsfortheIdekoAcquisition19.3BuildingtheFinancialModel(1of3)ForecastingEarningsProFormaDescribesastatementthatisnotbasedonactualdatabutratherdepictsafirm’sfinancialsunderagivensetofhypotheticalassumptions.19.3BuildingtheFinancialModel(2of3)ForecastingEarningsTobuildtheproformaincomestatement,beginwithIdeko’ssales.Eachyear,salescanbecalculatedasfollows:Therawmaterialscostcanbecalculatedfromsalesasfollows:19.3BuildingtheFinancialModel(3of3)ForecastingEarningsSales,marketing,andadministrativecostscanbecomputeddirectlyasapercentageofsales.Thecorporateincometaxiscomputedasfollows:Table19.7ProFormaIncomeStatementforIdeko,2005–2010TextbookExample19.3(1of2)ForecastingIncomeProblemBywhatpercentageisIdeko’sE

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Aexpectedtogrowoverthefive-yearperiod?ByhowmuchwoulditgrowifIdeko’smarketshareremainedat10%?TextbookExample19.3(2of2)SolutionEBITDAwillincreasefrom$16.25millionto$32.09million,oroverthefiveyears.Witha10%marketshareratherthana15%marketshare,saleswillbeonlyoftheforecastinTable19.7.BecauseIdeko’soperatingexpensesareproportionaltoitsunitsales,itsexpensesandE

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Awillalsobe66.7%ofthecurrentestimates.Thus,EBITDAwillgrowtowhichisanincreaseofonlyAlternativeExample19.3(1of2)ProblemBasedonthedatainAlternativeExample19.2,howmuchwillWilkerson’ssalesincreasebetween2019and2023,assumingitsellseachunitat$2.50in2019andexpectstobeabletoincreasethepriceby3%eachyear?AlternativeExample19.3(2of2)SolutionBasedontheforecastinAlternativeExample19.2,Wilkersonsold1,750,000unitsin2019forecasts4,734,000unitssoldin2023.Thepricein2019is$2.50.Withapriceincreaseof3%peryear,thepricein2023isexpectedtobeThus,salesin2019areandsalesin2023areforecastedtobeSalesareexpectedtoincreasebyWorkingCapitalRequirements(1of2)TheworkingcapitalforecastshouldincludetheplanstotightenIdeko’screditpolicy,speedupcustomerpayments,andreduceIdeko’sinventoryofrawmaterials.AccountsReceivablein2006iscalculatedasfollows:WorkingCapitalRequirements(2of2)Theminimumcashbalanceistheminimumlevelofcashneededtokeepthebusinessrunning.Firmstypicallyearnlittleornointerestonthesebalances.Asaconsequence,theopportunitycostofholdingcashisaccountedforbyincludingtheminimalcashbalanceaspartofthefirm’sworkingcapital.Table19.8Ideko’sWorkingCapitalRequirementsTable19.9Ideko’sNetWorkingCapitalForecastForecastingFreeCashFlowUsingthedatafromtheprevioustables,Ideko’sfreecashflowsoverthenextfiveyearscanbeforecastedTheafter-taxinterestexpenseiscalculatedasfollows:NetBorrowingiscalculatedasfollows:Table19.10Ideko’sFreeCashFlowForecastTextbookExample19.4(1of2)LeverageandFreeCashFlowProblemSupposeIdekodoesnotaddleveragein2008and2009,butinsteadkeepsitsdebtfixedat$100millionuntil2010.Howwouldthischangeinitsleveragepolicyaffectitsexpectedfreecashflow?Howwoulditaffectthefreecashflowtoequity?TextbookExample19.4(2of2)SolutionBecausefreecashflowisbasedonunleverednetincome,itwillnotbeaffectedbyIdeko’sleveragepolicy.Freecashflowtoequitywillbeaffected,however.Netborrowingwillbezeroeachyear,andthefirm’safter-taxinterestexpensewillremainatthe2006levelof$4.42million:Inthiscase,Idekowillhaveanegativefreecashflowtoequityin2008and2009.Thatis,withoutadditionalborrowing,K

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Pwillhavetoinvestadditionalcapitalinthefirmtofundtheexpansion.AlternativeExample19.4(1of3)ProblemWilkerson’sinitialforecastofitsfreecashflowforthenextthreeyearsdoesnotcurrentlyincludeanyadditionalleverage.BlankBlank202020212022BlankFreeCashFlow($000)BlankBlankBlank1FreeCashFlowofFirm$5,834$6,038$6,2802Plus:NetBorrowing$0$0$03Less:After-TaxInterestExpense($427)($427)($427)4FreeCashFlowtoEquity$6,261$6,465$6,707AlternativeExample19.4(2of3)ProblemThefirmisconsideringadding$1millionofadditionaldebtin2020,$1.5millionin2021,and$2millionin2022.Thefirmexpectsthedebttohaveapre-taxcostof7%,andthefirm’smarginaltaxrateis39%.Howwouldthischangeaffectthefreecashflowtoequity?AlternativeExample19.4(3of3)SolutionFreecashflowtoequitywillincreaseeachyear.Theafter-taxinterestexpensewillincreasefor2021and2022,whichslightlyoffsetstheincreaseindebt.BlankBlank202020212022BlankFreeCashFlow($000)BlankBlankBlank1FreeCashFlowofFirm$5,834$6,038$6,2802Plus:NetBorrowing$1,000$1,500$2,0003Less:After-TaxInterestExpense($427)($470)($491)4FreeCashFlowtoEquity$7,261$8,008$8,771TheBalanceSheetandStatementofCashFlows(Optional)(1of3)TheinformationcalculatedsofarcanbeusedtoprojectIdeko’sbalancesheetandstatementofcashflows.OnthebalancesheetCurrentassetsandliabilitiescomefromthenetworkingcapitalspreadsheet.Inventoryfiguresincludesbothrawmaterialsandfinishedgoods.Property,plant,andequipmentfigurescomefromthecapitalexpenditurespreadsheet.TheBalanceSheetandStatementofCashFlows(Optional)(2of3)StatementofCashFlowsStartswithnetincome.Cashfromoperatingactivitiesincludesdepreciationaswellaschangestoworkingcapitalitems(otherthancash).Cashfrominvestingactivitiesincludesthecapitalexpenditures.Cashfromfinancingactivitiesincludeschangesinoutstandingdebtanddividendsorstockissuance.TheBalanceSheetandStatementofCashFlows(Optional)(3of3)Debtfigurescomefromtheplanneddebtandinterestpaymentsspreadsheet.NewGoodwilliscalculated:Table19.11ProFormaStatementofCashFlowsforIdeko,2005–2010Table19.12ProFormaBalanceSheetforIdeko,2005–201019.4EstimatingtheCostofCapitalC

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M-BasedEstimationBecauseIdekoisnotpubliclytraded,comparablefirmsmustbeusedtoestimatedthefirm’sbeta.Thebetaforcomparablefirmsiscalculatedasfollows:Table19.13EquityBetaswithConfidenceIntervalsforComparableFirmsUnleveringBetaGivenanestimateofeachfirm’sequitybeta,the“unlevered”betamustbecalculated,basedonthefirm’scapitalstructure.Table19.14CapitalStructureandUnleveredBetaEstimatesforComparableFirmsFirmStartfractionEoverE+DendfractionstartfractionDoverE+DendfractionbetasubEbetasubDbetasubUOakley1.000.001.50Blank1.50Luxottica0.830.170.7500.62Nike1.05Negative0.050.6000.63Ideko’sUnleveredCostofCapital(1of2)ThedatafromthecomparablefirmsprovidesguidanceforestimatingIdeko’sunleveredcostofcapital.Ideko’sproductsarenotashighendasOakley’seyewear,soIdeko’ssalesareunlikelytovaryasmuchwiththebusinesscycleasOakley’ssalesdo.Idekodoesnothaveaprescriptioneyeweardivision,asLuxotticadoes.Ideko’sproductsarefashionitemsratherthanexerciseitems.Ideko’sUnleveredCostofCapital(2of2)Giventheaboveanalysis,Ideko’scostofcapitalislikelytobeclosertoOakley’sthantoNike’sorLuxottica’s.Youdecidetouse1.20asyourpreliminaryestimateforIdeko’sunleveredbeta.YourestimateofIdeko’sunleveredcostofcapitalisTextbookExample19.5(1of2)EstimatingtheUnleveredCostofCapitalProblemUsingthemonthlyequitybetaestimatesforeachfirminTable19.13,whatrangeofunleveredcostofcapitalestimatesispossible?TextbookExample19.5(2of2)SolutionOakleyhasthehighestequitybetaof1.99whichisalsoitsunleveredbeta(ithasnodebt).Withthisbeta,theunleveredcostofcapitalwouldbeAttheotherextreme,givenitscapitalstructure,Luxottica’sequitybetaof0.56impliesanunleveredbetaofWiththisbeta,theunleveredcostofcapitalwouldbeAswithanyanalysisbasedoncomparables,experienceandjudgmentarenecessarytocomeupwithareasonableestimateoftheunleveredcostofcapital.Inthiscase,ourchoicewouldbeguidedbyindustrynorms,anassessmentofwhichcomparableisclosestintermsofmarketrisk,andpossiblyknowledgeofhowcyclicalIdeko’srevenueshavebeenhistorically.AlternativeExample19.5(1of2)ProblemUSMetalReserveshasanequitybetaof1.25.Thefirmisfinancedwith70%equityand30%debt.Iftheexpectedreturnonthemarketis8%andtherisk-freerateis2%,whatisUSMetalReserve’sunleveredcostofequity?Assumethebetaofthefirm’sdebtis0.AlternativeExample19.5(2of2)SolutionUsingEquation19.12,thefirm’sunleveredbetaisTheunleveredcostofequitycanbecalculatedasfollows:19.5ValuingtheInvestment(1of4)TheMultiplesApproachtoContinuationValuePractitionersgenerallyestimateafirm’scontinuationvalue(alsocalledtheterminalvalue)attheendoftheforecasthorizonusingavaluationmultiple,withtheE

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Amultiplebeingthemultiplemostoftenusedinpractice.Table19.15ContinuationValueEstimateforIdeko19.5ValuingtheInvestment(2of4)TheMultiplesApproachtoContinuationValueThecontinuationvalueis1.8timesIdeko’s2010sales,andtheequityvalueis16.3timesIdeko’s2010earnings.Theseratiosarelowerthanthepeerratiosestimatedearlier.19.5ValuingtheInvestment(3of4)TheMultiplesApproachtoContinuationValueUnleveredRatioTheenterprisevalueofafirmdividedbyitsunleverednetincomeinaparticularyear.Ideko’sunleveredratiois18.4timesunleverednetincome.19.5ValuingtheInvestment(4of4)TheMultiplesApproachtoContinuationValueOnedifficultywithrelyingoncomparableswhenforecastingacontinuationvalueisthatfuturemultiplesofthefirmarebeingcomparedwithcurrentmultiplesofitscompetitors.TheDiscountedCashFlowApproachtoContinuationValue(1of5)TheenterprisevalueinyearT,usingtheW

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Cvaluationmethod,iscalculatedasfollows:FreecashflowinyearT+1iscomputedasfollows:TheDiscountedCashFlowApproachtoContinuationValue(2of5)Iffirm’ssalesareexpectedtogrowatanominalrategandthefirm’soperatingexpensesremainafixedpercentageofsales,thenitsunleverednetincomewillalsogrowatrateg.Similarly,thefirm’sreceivables,payables,andotherelementsofnetworkingcapitalwillgrowatrateg.TheDiscountedCashFlowApproachtoContinuationValue(3of5)IfcapitalexpendituresaredefinedasThenfreecashflows,giveng,canbeestimatedasTextbookExample19.6(1of3)AD

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FEstimateoftheContinuationValueProblemEstimateIdeko’scontinuationvaluein2010assumingafutureexpectedgrowthrateof5%,afuturedebt-to-valueratioof40%,andadebtcostofcapitalof6.8%.TextbookExample19.6(2of3)SolutionIn2010,Ideko’sunleverednetincomeisforecastedtobe$15.849million(Table19.10),withworkingcapitalof$40.425million(Table19.9).Ithasfixedassetsof$69.392million(Table19.4).FromEquation19.17,wecanestimateIdeko’sfreecashflowin2011:Thisestimaterepresentsnearlyan8%increaseoverIdeko’s2010freecashflowof$10.328million.Itexceedsthe5%growthrateofsalesduetothedeclineintherequiredadditionstoIdeko’snetworkingcapitalasitsgrowthrateslows.TextbookExample19.6(3of3)Withadebt-to-valueratioof40%,Ideko’sW

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CcanbecalculatedfromEquation18.11orEquation12.13:GiventheestimateofIdeko’sfreecashflowandW

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C,wecanestimateIdeko’scontinuationvaluein2010:ThiscontinuationvaluerepresentsaterminalE

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AmultipleofAlternativeExample19.6(1of3)ProblemAssumeWilkerson’sunleverednetincomeisforecastedtobe$12millionin2023.Networkingcapitalisforecastedtobe$70millionin2023.Fixedassetsareforecastedtobe$85millionin2023.Expectedgrowthis4%.AlternativeExample19.6(2of3)ProblemAssumeTheunleveredcostofequityis11%.Debt-to-valueratioisforecastedtobe50%in2023.Debtcostofcapitalisforecastedtobe7%in2023.Thetaxrateisestimatedtobe39%in2023.EstimateWilkerson’scontinuationvaluein2023.AlternativeExample19.6(3of3)SolutionTheDiscountedCashFlowApproachtoContinuationValue(4of5)Boththemultiplesapproachandthediscountedcashflowapproachareusefulinderivingarealisticcontinuationvalueestimate.Itisrecommendedtocombinebothapproaches.Table19.16DiscountedCashFlowEstimateofContinuationValue,WithImpliedE

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AMultiple*Netinvestmentequalsthedifferencebetweencapitalexpendituresanddepreciation,sosubtractingthisamountisequivalenttoaddingbackdepreciationandsubtractingcapitalexpenditures(seeEquation9.20).TheDiscountedCashFlowApproachtoContinuationValue(5of5)TheprojectedE

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Amultipleof9.1canbejustifiedaccordingthediscountedcashflowmethodwithanominallong-termgrowthrateofabout5.3%.Givenaninflationrateof2%,thisnominalraterepresentsarealgrowthrateofabout3.3%.Ifthisimpliedgrowthrateismuchhigherthantheexpectationsoflong-rungrowthfortheindustryasawhole,youshouldbemoreskepticaloftheestimatebeingused.A

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VValuationofIdekoEquity(1of3)TheestimateofIdeko’scontinuationvaluecanbecombinedwiththeforecastsforfreecashflowthrough2010toestimateIdeko’svaluetodayusingtheA

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Vvaluationmodel.A

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VValuationofIdekoEquity(2of3)ThefirststepistocomputeIdeko’sunleveredvalue.Next,theinteresttaxshieldneedstobecomputed.A

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Vvaluationmodel,theestimateforIdeko’sinitialenterprisevalueis$213million,withanequityvalueof$113million(asshownonthefollowingslide).GiventhatK

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’sinitialcosttoacquireIdeko’sequityis$53million,thedeallooksattractivewithanN

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Vof$60million.

Table19.17A

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VEstimateofIdeko’sInitialEquityValueARealityCheck(1of2)Atthispoint,itiswisetostepbackandassesswhetherthevaluationresultsmakesense.Doesaninitialenterprisevalueof$213millionforIdekoseemreasonablecomparedtothevaluesofotherfirmsintheindustry?Computetheinitialvaluationmultiplesthatwouldbeimpliedbyourestimatedenterprisevalueof$213millionandcomparethemtoIdeko’sclosestcompetitors.Table19.18IdekoFinancialRatiosComparison,Mid-2005,BasedonDiscountedCashFlowEstimateVersusProposedPurchasePriceRatioIdeko(EstimatedValue)Ideko(PurchasePrice)Oakley,Inc.LuxotticaGroupNike,Inc.SportingGoodsstartfractionPoverEendfraction31.0times21.6times.24.8times.28.0times.18.2times.20.3times.startfractionEVoverSalesendfraction2.8times.2.0times.2.0times.2.7times.1.5times.1.4times.startfractionEVoverEBITDAendfraction.13.1times.9.1times.11.6times.14.4times.9.3times.11.4times.ARealityCheck(2of2)Themultiplesarenowatthetopendorsomewhatabovetherangeofthevaluesoftheotherfirmsusedforcomparison.AlthoughthesemultiplesarenotunreasonablegiventheoperationalimprovementsthatK

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Pplanstoimplement,theyindicatethattheforecastmaybesomewhatoptimisticanddependcriticallyonK

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’sabilitytoachievetheoperationalimprovementsitplans.I

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RandCashMultiples(1of2)PractitionersoftenuseI

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Randthecashmultipleasalternativevaluationmetrics.TocomputetheI

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’scashflowsoverthelifeofthetransactionmustbecomputed.AssumingK

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PwillsellitsequityshareinIdekoattheendoffiveyears,theI

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Rforthetransactionis33.3%,asshownonthefollowingslide.Table19.19I

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RandCashMultipleforK

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RandCashMultiples(2of2)CashMultipleTheratioofthetotalcashreceivedtothetotalcashinvestedThecashmultipleiscomputedasfollows:K

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Pexpectstoreceiveareturnthatis3.7timesitsinvestmentinIdeko.Thecashmultiplehasanobviousweakness.Itdoesnotdependontheamountoftimeittakestoreceivethecash,nordoesitaccountfortheriskoftheinvestment.Itisthereforeusefulonlyforcomparingdealswithsimilartimehorizonsandrisk.19.6SensitivityAnalysis(1of3)Itisimportanttoassesstheuncertaintyoftheforecastsandtodeterminetheirpotentialimpactonthevalueofthedeal.SensitivityanalysiscanshowthesensitivityoftheestimatesofthevalueofK

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’sinvestmenttochangesintheassumptionsregardingtheexitE

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AmultiplethatK

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PobtainswhenIdekoissold,aswellasIdeko’sunleveredcostofcapital.Table19.20SensitivityAnalysisforK

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P’sInvestmentinIdeko19.6SensitivityAnalysis(2of3)Thetableinthepreviousslideshowsthateach1.0increaseintheE

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Amultiplerepresentsabout$20millionininit