Spyder Sports Case
Financial Valuation of Spyder Active Sports Inc. April 27, 2011 Analysis By:
Sean Baeyens
Taylor Zuccolotto
Mengyu Zhu
Larry Hu
Mohamed Alloo
1.a) To value Spyder Active Sports Inc., we decided to use the WACC method since we can easily value its cost of assets with the data immediately available to us in the case. We first unlevered the beta’s of 7 comparable companies and took the average to get a comparable unlevered beta for Spyder (Exhibit 1). Since we are assuming Spyder is entirely equity financed, its unlevered asset beta is equal to the beta of its assets. We now have a rough estimate of Spyder’s asset beta, we can use CAPM to calculate the cost of assets of the firm (Exhibit 2). With an appropriate discount rate, we can use the WACC method to discount the company’s projected cash flows. Again, since the company is entirely comprised of equity, the cost of assets is the cost of the entire firm, so we will use it in place of WACC. Using Spyder’s pro-forma income statement, we then calculate the FCF’s for the next 4 years and discount those using our cost of assets (Exhibit 3).
By graphing its sales and revenues over the past 3 years, and projected for the next 3 years (Exhibit 5) we predict the growth rate of Spyder at terminal value (after 2008) to be between 20-30%. However the firm is in a period of unusual and unsustainable growth and we have decided to use 2 different growth scenarios, conservative (expected) and optimistic. Using Gordon Growth Model, we then determine the terminal value using growth in perpetuity and discount it back to present value. By adding these terminal values to the discounted free cash flows we calculated earlier, we get a range of enterprise values, each reflecting different scenarios (Exhibit 4).
b) A second rough and quick way to estimate an approximate valuation of Spyder active sports, is to look at
Sean Baeyens
Taylor Zuccolotto
Mengyu Zhu
Larry Hu
Mohamed Alloo
1.a) To value Spyder Active Sports Inc., we decided to use the WACC method since we can easily value its cost of assets with the data immediately available to us in the case. We first unlevered the beta’s of 7 comparable companies and took the average to get a comparable unlevered beta for Spyder (Exhibit 1). Since we are assuming Spyder is entirely equity financed, its unlevered asset beta is equal to the beta of its assets. We now have a rough estimate of Spyder’s asset beta, we can use CAPM to calculate the cost of assets of the firm (Exhibit 2). With an appropriate discount rate, we can use the WACC method to discount the company’s projected cash flows. Again, since the company is entirely comprised of equity, the cost of assets is the cost of the entire firm, so we will use it in place of WACC. Using Spyder’s pro-forma income statement, we then calculate the FCF’s for the next 4 years and discount those using our cost of assets (Exhibit 3).
By graphing its sales and revenues over the past 3 years, and projected for the next 3 years (Exhibit 5) we predict the growth rate of Spyder at terminal value (after 2008) to be between 20-30%. However the firm is in a period of unusual and unsustainable growth and we have decided to use 2 different growth scenarios, conservative (expected) and optimistic. Using Gordon Growth Model, we then determine the terminal value using growth in perpetuity and discount it back to present value. By adding these terminal values to the discounted free cash flows we calculated earlier, we get a range of enterprise values, each reflecting different scenarios (Exhibit 4).
b) A second rough and quick way to estimate an approximate valuation of Spyder active sports, is to look at