Fi512 Dcf Valuation Assignment

1. [DCF Valuation and Ownership Concepts] The venture investors and founders of ACE Products, a closely held corporation, are contemplating merging the successful venture into a much larger diversified firm that operates in the same industry. ACE estimates its free cash flows that will be available to the enterprise next year at $5,200,000. Since the venture is now in its maturity stage, ACE’s free cash flows are expected to continue to grow at a 6 percent annual compound growth rate in the future. A weighted average cost of capital (WACC) for the venture is estimated at 15 percent. Interest-bearing debt owed by ACE is $17.5 million. In addition, the venture has surplus cash of $4 million. ACE currently has five million shares outstanding, with three million held by venture investors and two million held by founders. The venture investors have an average investment of $2.50 per share while the founders’ average investment is $.50 per share.

A. Based on the above information, estimate the enterprise value of ACE Products. What would be the value of the venture’s equity?

According to Chapter 9 of the text: the current value of a growing perpetuity is the next period’s cash flow (VCFT) divided by the spread between the assumed constant discount (r∞) and growth (g) rates:

Enterprise operating value would equal:
Enterprise next year at $5,200,000/ (WACC for the venture is estimated at 15 percent - expected to continue to grow at a 6 percent) 5,200,000 / (.15 - .06) = 57,777,777.78 or $57,777,778

Total entreprise value = $57,777,778 enterprise operating value + $4,000,0000 surplus cash = $61,777,778

Equity Value = $61,777,778 Total enterprise value - $17,500,000 interest bearing debt owed = $44,277,778

B. How much of the value of ACE would belong to the venture investors versus the founders? How much would the venture be worth on a per-share basis?

ACE currently has five million shares outstanding, with three million held by