Corporate Valuation - Exercises

A Primer to Wall Street

Valuation Methodologies

Preparing Financial
Professionals for Success
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Corporate_Valuation_Exercises_PRINTOUT_v13.0.1
1) Primer to the Financial Statements
Calculating EBITDA – Drill
Income Statement
Year 1 Year 2 Calculate EBIT and EBITDA!
Total revenues $ 4,291.8 $ 4,482.7
Cost of goods sold 2,805.6 2,887.1 Year 1 Year 2
Gross profit 1,486.2 1,595.6
EBIT
SG&A 1,071.6 1,135.3 Depreciation
Other operating expenses 16.1 17.0
Operating income 398.5 443.3 Amortization
Interest expense 84.3 60.7 EBITDA
Interest (income) (8.4) (8.0)
Other non-operating expenses 1.5 1.8
Pretax income 321.1 388.8
EBITDA ≠ Actual Cash Flow!
Income taxes 94.3 113.2
Net income $ 226.8 $ 275.6

Cash Flow Statement

Operating Activities Year 1 Year 2
Net income $ 226.8 $ 275.6
Depreciation 133.4 142.5
Amortization 9.0 10.4
Deferred taxes 16.3 (14.9)
Net working capital (93.1) (105.2)
Net operating cash flow $ 292.4 $ 308.4

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2) Public Comparables Analysis

“Analysis of Selected Publicly Traded Companies”

“Trading Comparables”
“Trading Multiples”
“Comp Co’s”
“Equity Comps”
“Common Stock Comparisons”
Calculating Market Value – Exercise
Assumptions:
Cadbury plc share price as of Sep. 4, 2009 £5.68
Shares outstanding (millions) 1,366.571
In-the-money options outstanding (millions) 50.999
Average option strike price £4.33
Calculations:
1) Option proceeds 3) Diluted shares outstanding

2) Shares repurchased under TSM 4) Market value

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Normalizing Financials – Exercise

• Calculate the pre-tax impact on EBIT “As if” the non-

recurring item never happened
– Reverse the charge/loss or gain/income
• Leave out the non-recurring line item

Reported Adjustment Normalized

Sales $1,248.0 $1,248.0
Cost of goods sold 773.0 773.0
Gross profit 475.0 475.0
SG&A expense 275.0 275.0
Restructuring charge 48.0
EBIT 152.0
% margin 12.2%

Footnotes
1) During the first quarter TTS, Inc. took a restructuring charge of $48.0 million ($32.0 million after tax).

What is the normalized EBIT margin?

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Normalizing Taxes – Exercise
Reported Adjustment Normalized
Sales $1,248.0 $1,248.0
Cost of Goods Sold 773.0 773.0
Gross Profit 475.0 475.0
SG&A Expense 275.0 275.0
Restructuring Charge 48.0 (48.0) a. 0.0
EBIT 152.0 200.0
% margin 12.2% 16.0%
Interest Expense 38.0 38.0
Interest (Income) (2.0) (2.0)
Pretax Income 116.0 164.0
Income Taxes 42.0 b.
Net Income $74.0
Diluted Weighted Average (MM) 75.841 75.841
Earnings Per Share $0.98

Footnotes
1) During the first quarter TTS, Inc. took a restructuring charge of $48.0 million ($32.0 million after tax).

Non-recurring items
Pre-tax amount a.
Less: (After-tax amount)
= Adjustment to taxes b.
Upon removal of the non-recurring item from the Income Statement…
Earnings increased or decreased?
Taxes increased, decreased or remained neutral?

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TTS Spreading Drill

TTS Detour
Normalize TTS Company

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TTS Company Income Statement

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TTS Company Cash Flow Statement

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TTS Company Footnotes*
NOTE 4. BUSINESS REALIGNMENT INITIATIVES

In July 2008, the Company announced initiatives intended to advance its value-enhancing strategy.
The Company also announced that it would record a total pre-tax charge of approximately $140
million to $150 million, or $.41 to $.44 per share-diluted in connection with the initiatives. Of the
total pre-tax charge, approximately $80 million will be incurred in connection with a U.S. Voluntary
Workforce Reduction Program (“VWRP”), approximately $41 million will be incurred in connection
with facility rationalization and approximately $24 million will be incurred in connection with
streamlining and restructuring the Company’s international operations, including a Canadian
VWRP.

During the second half of 2008, the Company recorded charges totaling $119.0 million pre-tax
($74.0 million after tax) associated with the initiatives. The charges of $119.0 million consisted of a
$96.5 million business realignment charge and $22.5 million recorded in cost of sales (together, the
“2008 business realignment initiatives”). The business realignment charge included $69.5 million
related to the U.S. VWRP, $12.8 million for facility rationalization relating to the closure of the Las
Piedras, Puerto Rico plant and $14.2 million related to streamlining the Company’s international
operations, primarily associated with costs for the Canadian VWRP. The business realignment
charge included $8.3 million for involuntary termination benefits primarily for Las Piedras plant
employees. The Company believes that the 2008 business realignment initiatives will be fully
completed by December 31, 2009.
* Numbers in millions

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Calculating LTM – Drill

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Calculating Multiples – Drill
In millions, except for per share data

Cadbury plc Financial Information Multiple:

Share price (as of 9/4/09) £5.68
CBRY 2009E EPS £0.35
CBRY 2010E EPS £0.40
Expected EPS growth rate 14.1% PEG Ratio: (based on 2010E P/E)

Market value £7,831.0

Enterprise value £9,601.0
LTM net sales £5,711.0
LTM EBITDA £887.0
LTM EBIT £720.0

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Interpreting the Multiples – Drill
• Main drivers of multiples:
– Risk

– Growth

• Does Cadbury trade at a premium or at a discount to

its peers?*

• What would you recommend to Cadbury’s board

based on its relative value?*

* Based on September 4, 2009 share price and publicly available information.

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 Sample Trading Multiples Summary
Market Multiples Analysis
(Figures in millions, except per share data)
Enterprise Value Price
Stock Price as a Multiple of: as a Multiple of: Proj.
as of: Market Value Enterprise LTM LTM LTM CY+1 CY+2 5 Yr EPS PEG
Company Sept. 4, 2009 of Equity Value (a) Sales EBITDA EBIT EPS EPS Gr. Rate Ratio
Campbell Soup Co. £19.10 £6,689.7 £8,234.4 1.73x 9.0x 10.8x 13.9x 13.0x 7.4% 1.7x
ConAgra Foods, Inc. 12.69 5,621.5 7,599.6 0.98 8.2 10.3 12.9 12.1 9.6% 1.3
Danone 32.69 (b) 20,028.1 26,010.6 1.99 11.6 14.6 17.7 15.7 8.8% 1.8
Hershey Co. 23.65 5,372.8 6,460.4 2.00 10.8 12.9 18.6 17.3 8.8% 2.0
HJ Heinz Co. 23.14 7,294.4 10,255.3 1.67 9.5 11.3 14.2 13.1 7.6% 1.7
Kraft Foods Inc. 17.20 25,375.6 36,666.4 1.47 10.0 11.7 14.3 13.1 9.0% 1.5
Nestlé S.A. 24.88 (c) 89,958.3 102,088.7 1.63 9.2 10.7 15.5 14.5 6.9% 2.1
Sara Lee Corp. 5.74 3,995.1 5,138.7 0.65 5.5 8.1 10.3 9.4 10.3% 0.9
Tootsie Roll Industries Inc. 14.03 808.9 783.5 2.46 14.1 17.5 26.3 24.1 NA NA
High 2.46x 14.1x 17.5x 26.3x 24.1x 10.3% 2.1x
Average 1.62 9.8 12.0 16.0 14.7 8.5% 1.6
Median 1.67 9.5 11.3 14.3 13.1 8.8% 1.7
Low 0.65 5.5 8.1 10.3 9.4 6.9% 0.9
Cadbury plc £5.68 £7,831.0 £9,601.0 1.67x 10.8x 13.3x 16.3x 14.3x 14.1% 1.0

(a) Calculated as Market Value of Equity plus total debt, minority interest and preferred stock, less cash & equivalents
(b) Converted to GBP at an exchange rate of 0.8712 EUR per GBP
(c) Converted to GBP at an exchange rate of 0.4739 CHF per GBP
All US based companies converted to GBP at an exchange rate of 0.6123 USD per GBP
Financial data provided by Capital IQ
Other considerations:
− In addition to LTM, common to see multiples based on projections
− 52 week trading range

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Sample Performance Comparison
Performance Analysis
(Figures in millions, except per share data)
Stock Price LTM
as of: % Off 52 LTM Margins Total Debt / Total Debt / EBITDA/
Company Sept. 4, 2009 Week High EBITDA Net Inc. Total Capital EBITDA Int Exp
Campbell Soup Co. £19.10 23.6% 20.2% 9.6% 78.2% 1.7x 13.9x
ConAgra Foods, Inc. 12.69 0.1% 12.2% 5.3% 42.0% 2.3 5.4
Danone 32.69 (a) 31.3% 17.0% 6.8% 41.1% 3.5 5.9
Hershey Co. 23.65 12.8% 18.5% 8.5% 79.4% 1.8 10.0
HJ Heinz Co. 23.14 28.7% 18.0% 8.3% 75.8% 3.0 5.1
Kraft Foods Inc. 17.20 19.6% 14.8% 6.0% 45.3% 3.4 4.7
Nestlé S.A. 24.88 (b) 14.6% 15.0% 7.6% 31.4% 1.7 18.3
Sara Lee Corp. 5.74 33.9% 11.5% 3.8% 57.5% 2.2 7.3
Tootsie Roll Industries Inc. 14.03 30.5% 17.6% 9.0% 1.2% 0.1 234.9
High 20.2% 9.6% 79.4% 3.5x 234.9x
Average 16.1% 7.2% 50.2% 2.2 34.0
Median 17.0% 7.6% 45.3% 2.2 7.3
Low 11.5% 3.8% 1.2% 0.1 4.7
Cadbury plc £5.68 15.6% 14.8% 6.6% 40.8% 2.5x 5.2x
(a) Converted to GBP at an exchange rate of 0.8712 EUR per GBP
(b) Converted to GBP at an exchange rate of 0.4739 CHF per GBP
All US based companies converted to GBP at an exchange rate of 0.6123 USD per GBP
Financial data provided by Capital IQ
Consider including statistics relevant to
the industry and historical growth rates.
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Implied Price – Drill
Assumptions as of September 4, 2009:
Diluted shares = 1,378.697 million LTM EBITDA = £887.0 million
Net debt = £1,770.0 million 2009E EPS = £0.35
LTM sales = £5,711.0 million 2010E EPS = £0.40
Questions: Based on public comparables analysis, what is…
1) … a reasonable EBITDA multiple range: 10.0x to 12.0x?
2) … the implied enterprise and equity values?
3) … the implied price per share?

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Public Comps – Knowledge Check
Facts for Company XYZ:
• Closing stock price is $18.00
• 1,000 shares outstanding, and 100 outstanding options outstanding with an average exercise
price of $4.50
• Total debt of $8,000 and cash of $350
XYZ Income Statement Reported Normalized
Sales $12,000
Cost of Goods Sold 8,000
Gross Profit 4,000
Depreciation & Amortization 1,000
S,G&A (a) 2,000
Operating Income 1,000
Interest Expense 710
Pre-Tax Income 290
Taxes 116
Net Income $174
(a) Includes a one-time legal settlement resulting in a charge of $1,000 pre-tax ($600 after-tax)
Calculate:
• XYZ Market and Enterprise Values
• Multiples of Sales, EBITDA, EBIT and Net Income
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3) Acquisition Comparables Analysis

“Acquisition Comparables”
“Precedent Transactions”
“Deal Comps”
“Transaction Comps”
“M&A Comps”
Interpreting the Multiples – Drill
• Main drivers of multiples:
– Risk

– Growth

• Why was Wrigley’s and Ralston Purina’s EBITDA

multiple so high?

• Why did Keebler sell for a lower multiple?

• What is reasonable to expect for Cadbury?

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Sample Acquisition Deal List

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Implied Multiple – Drill
Assumptions as of September 4, 2009:
Diluted shares = 1,378.697 million LTM EBITDA = £887.0 million
Net debt = £1,770.0 million 2009E EPS = £0.35
LTM sales = £5,711.0 million 2010E EPS = £0.40
Question:
What is the multiple of EBITDA assuming a purchase price of £7.55 per
share?

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Acq. Comps – Knowledge Check
Facts:
• Company A has agreed to buy TARGET for $20.00 a share in stock
• Company A and TARGET’s stock prices on the day before announcement were
$35.00 and $16.00, respectively
• TARGET has 15,000 shares outstanding, 2,000 options outstanding with an average
exercise price of $7.50 and $175,000 in net debt to be assumed by Company A
(Hint: use treasury stock method and repurchase shares at the offer price)

Target Income Statement Items:

LTM Revenues $625,000
LTM EBITDA 40,000
LTM Net Income 14,440
Calculate:
1) Premium paid
2) Offer Value and Transaction Value
3) Multiples of Sales, EBITDA and Net Income

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4) Discounted Cash Flow Analysis
Sample DCF Projections – Drill

Assuming a discount rate of 8%, what is the

present value of the unlevered free cash flows?

Note: Present values calculated as of December 31, 2008.

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 Calculator Tip: NPV of UNEVEN CFs
464.6
350.5 405.3 TTS Help
300.1
0.0 252.7
Make sure your calculator is
set for the END mode and
0 1 2 3 4 5 that you have it set for ONE
payment per year.
PV = ??? i = 8%

HP 12C HP 17B II TI BA II Plus

Step Generic Steps Keystroke Display (Comment) Keystroke Display (Comment) Keystroke Display (Comment)
1) Main menu shift key, [MAIN]
2) Finance menu FIN menu SELECT A MENU
3) Cash Flow menu CFLO menu CF CF0
4) Clear all registers gold [f], [REG] 0.00 shift key, CLEAR DATA CLEAR THE LIST? 2ND [CLR WORK]
5) YES FLOW(0)=?
6) 0 0, blue [g], [CF0] 0.00 0, INPUT FLOW(1)=? Ð C01
7) 252.7 252.7, blue [g], [CFj] 252.70 252.7, INPUT # TIMES(1) = 1 252.7, ENTER, Ð F01 = 1.00
8) Times prompt INPUT FLOW(2)=? Ð C02
9) 300.1 300.1, blue [g], [CFj] 300.10 300.1, INPUT # TIMES(2) = 1 300.1, ENTER, Ð F02 = 1.00
10) Times prompt INPUT FLOW(3)=? Ð C03
11) 350.5 350.5, blue [g], [CFj] 350.50 350.5, INPUT # TIMES(3) = 1 350.5, ENTER, Ð F03 = 1.00
12) Times prompt INPUT FLOW(4)=? Ð C04
13) 405.3 405.3, blue [g], [CFj] 405.30 405.3, INPUT # TIMES(4) = 1 405.3, ENTER, Ð F04 = 1.00
14) Times prompt INPUT FLOW(5)=? Ð C05
15) 464.6 464.6, blue [g], [CFj] 464.60 464.6, INPUT # TIMES(5) = 1 464.6, ENTER, Ð F05 = 1.00
16) Times prompt INPUT FLOW(6)=? Ð C06
17) Return to calc menu EXIT (select menu)
18) Go to NPV menu CALC NPV I = 0.00
19) Enter 8% discount rate 8, I 8.00 8, I% menu I%=8 8, ENTER I=8
20) Ð NPV = 0.00
21) Calculate NPV gold [f], [NPV] 1,383.61 NPV 1,383.61 CPT 1,383.61

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Calculating the Terminal Value – Drill
Assumptions:
– Discount rate = 8.0%
– 2013 projected EBITDA of £1,190.8m
– Exit multiple of 10.0x EBITDA
• Calculate the present value of the terminal value

Note: Present values calculated as of December 31, 2008.

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Equity Value per Share – Drill
Assumptions:
– Discount rate = 8.0%
– PV of FCFs = £1,383.6m
– PV of Terminal Value = £8,104.4m
– Net debt = £1,770m
– Diluted shares = 1,378.697m
• Calculate the equity value per share

Note: Present values calculated as of December 31, 2008.

Net debt calculation = total debt + preferred stock + minority interest – equity investments – cash (as of June 3, 2009)
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DCF – Knowledge Check
Projected FYE December 31
FYE+1
2006 FYE+2
2007 FYE+3
2008 FYE+4
2009 FYE+5
2010
Sales $418.0 $443.1 $469.7 $497.8 $527.7
EBITDA 50.2 53.2 56.4 59.7 63.3
Less: Depreciation & Amortization (6.4) (6.5) (6.6) (7.1) (7.7)
EBIT 43.8 46.7 49.8 52.6 55.6
Less: Taxes @ 40.0% (17.5) (18.7) (19.9) (21.1) (22.3)
Tax-effected EBIT 26.3 28.0 29.9 31.6 33.4
Plus: Depreciation & Amortization 6.4 6.5 6.6 7.1 7.7
Less: Capital Expenditures (8.0) (8.0) (8.0) (8.0) (8.0)
Less: Changes in Working Capital (3.3) (3.5) (3.7) (3.9) (4.2)
Unlevered Free Cash Flow $21.4 $23.0 $24.7 $26.8 $28.9

Shares Outstanding
21.250

Assumptions Calculate as of 12/31/05

Perpetuity growth rate of 4.0% 1) Cost of equity
Terminal exit multiple of 7.0x 2) WACC
Beta = 1.3 3) Present value of free cash flows
Risk-free rate of 4.1% 4) Present value of the terminal value based on perpetuity growth rate method
Market risk premium of 8.0% 5) Present value of the terminal value based on the EBITDA exit multiple method
Cost of debt of 7.5% 6) Equity value based on exit multiple terminal value
Debt of $119, cash of $0 7) Equity value per share based on exit multiple terminal value
Market value of equity of $221
Marginal tax rate of 40.0%

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5) Merger Consequences Analysis

“Pro Forma Analysis”

“Affordability Analysis”
“Accretion/Dilution Analysis”
Sample M&A Analysis
 Kraft Acquiring Cadbury: Key Facts*

Kraft Information Cadbury Information (c)

Share price $29.58 (a) Share price as of Sep. 4, 2009 $9.26
Diluted shares outstanding 1,478.590 Diluted shares outstanding 1,415.000 (d)
EBITDA $6,240.2 (b) EBITDA $1,525.7
Net income 2,851.0 Net income 859.0
EPS $1.93 EPS $0.61
Existing total debt $16,513.0 (b) Existing total debt $2,977.1
Tax rate 38.0% Offer price per share (£8.40) $13.69
Interest on new debt 5.4%
(a) Share price and diluted shares outstanding as of January 15, 2010
(b) Financial information adjusted for the sale of the frozen pizza business to Nestlé
(c) Converted to US dollars at an exchange rate of 1.63
(d) As of January 18, 2010 After-tax
Acquirer’s Target’s
+ Net Income +/- “Incremental
Net Income
Pro Forma Adjustments”
=
EPS
Acquirer’s + New
Shares Outstanding Shares Issued
* Numbers in millions, except per share data
Numbers as of December 31, 2009, except where noted

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 Kraft Acquiring Cadbury at $13.69*
Assuming a blended offer price of $5.54 stock, $8.15 cash, and
no write-ups, please calculate the following under US GAAP:
1) Offer value 2) Exchange ratio

3) New shares issued to Cadbury shareholders 4) New debt issued to finance the transaction

* Converted to US dollars from £8.40 at an exchange rate of GBP 1.63

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Kraft Acquiring Cadbury (cont’d)
Transaction detail: Interest rate on new debt = 5.4%
Tax rate = 38.0%
5) After-tax cost of new debt issued 6) Pro forma EPS

7) Accretion / (dilution) $ and %

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Kraft Acquiring Cadbury (cont’d)
Transaction detail: Tax rate = 38.0%
8) Pre-tax synergies to breakeven 9) Pro forma leverage ratio (Debt / EBITDA)

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 100% Stock: Breakeven Offer Price?*
• Assume:
– Kraft: price of $29.58 & projected EPS of $1.93
– Cadbury: projected EPS of $0.61
• What is the breakeven offer price under 100%
STOCK scenario?

* Assuming (1) stock issued for 100% of the deal consideration, (2) before purchase accounting adjustments, such as D&A from write-ups, and (3) before synergies.

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M&A – Knowledge Check
Acquirer Information Target Information
Current share price $67.69 Current share price $13.46
Total assets $7,604.3 Total assets $434.3
Total liabilities 3,040.8 Total liabilities 99.9
Existing goodwill 134.7 Existing goodwill 24.6

Tax rate 35.0% Net income $46.0

Interest on new debt 4.0% Diluted shares outstanding 69.372
EPS $0.66
Net income 1,003.1
Diluted shares outstanding 271.100 Offer Price per share $16.15
EPS $3.70
*Dollars and shares in millions, except per share data.

(Acq Net Income + Target Net Income + "Adjustments")

Pro Forma EPS = (Acq Shares + New Shares Issued)

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M&A – Knowledge Check (cont’d)
Assuming a 80% stock, 20% cash purchase, calculate the following under US GAAP SFAS 142:
A) Offer value B) Goodwill created (assuming no write-up)

C) Exchange ratio D) Number of shares issued to the Target

E) New debt issued F) After-tax cost of new debt issued

G) Accretion / (dilution) amount (in $) H) Pre-tax synergies to breakeven

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6) Leveraged Buyout Analysis
Deleveraging – Exercise
Let’s assume the Company does not grow, and generates cash
flow of $200mm over 5 years
Initial: Acquired for 8.0x's LTM EBITDA of $125.0. Future: Sold for 8.0x's LTM EBITDA of $125.0
(no growth in Company)

Initial Future
$1,000

$300 Equity
Equity

$700
Debt
Debt

What is the annualized return over 5 years? TTS Help

IRR = [FV / PV](1/N)-1

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Op. Improvements – Drill
If the Company can improve operations, it can generate
additional cash flows to pay debt ($300mm over 5 years)
Initial: Acquired for 8.0x's LTM EBITDA of $125.0. Future: Sold for 8.0x's LTM EBITDA of $150.0

Initial Future
$1,000

$300 Equity
Equity

$700
Debt
Debt
TTS Help
What is the annualized return over 5 years? Since operations are improving, the
company can now paydown
$300mm of debt over 5 years

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Illustration of Debt Capacity – Drill
• At “5.0x leverage,” what is the debt capacity of
Target?
– Target LTM EBITDA = $70.0 MM
– Assume Target has no existing debt outstanding

• Assuming 30% equity contribution, what is the

maximum purchase price a financial sponsor can
pay, assuming 5.0x leverage?

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IRR to the Sponsor – Drill
• A financial sponsor is willing to buy Target for
$500 MM
• The sponsor will invest 30% of the purchase price
in equity
• In 5 years, the sponsor expects:
– To sell the company for 7.1x Year 5 EBITDA of $96.6 MM
– Target to have net debt of $200 MM
• Please calculate the IRR to the sponsor

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Calculator Tip: IRR to the Sponsor
• A financial sponsor invests $300 MM in a company and in 5
years when they sell the value of their investment increases
to $700 MM
• Please calculate the IRR to the sponsor FV = 700.0

Remember that either the PV PMT = 0

or the FV must be negative
when solving for i!
+
– 1 2 3 4 N=5

PV = 300.0 i = ???

HP 12C HP 17B II TI BA II Plus

Step Generic Steps Keystroke Display (Comment) Keystroke Display (Comment) Keystroke Display (Comment)

1) Main menu shift key, [MAIN]

2) Finance menu FIN menu SELECT A MENU
3) Time Value of Money menu TVM menu
4) Clear all registers gold [f], [REG] shift key, [CLEAR DATA] 2ND [CLEAR TVM]
5) -300.0 300, CHS, PV -300.00 300, +/-, PV menu PV=-300.00 300, +/-, PV PV= -300.00
6) 700.0 700, FV 700.00 700, FV menu FV=700.00 700, FV FV= 700.00
7) 0 0, PMT 0.00 0, PMT menu PMT=0.00 0, PMT PMT= 0.00
8) 5 5, N 5.00 5, N menu N=5.00 5, N N= 5.00
9) CPT
10) Calculate present value i 18.47% I%YR 18.47% I/Y 18.47%

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LBO – Knowledge Check
Assumptions:
Diluted shares = 1,378.697 million Year 5 EBITDA = £1,190.8 million
Net debt = £1,770.0 million Year 5 Net Debt = £4,000.0 million
LTM EBITDA = £887.0 million
Facts:
• A financial sponsor is willing to buy the target for 8.0x LTM EBITDA
• The sponsor wants to invest only 30% of the purchase price in equity
• The sponsor expects to sell the company in 5 years for 8.0x EBITDA
Questions:
• What is the offer price per share? ● What is the IRR to the sponsor?

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