discounted cash flow - record masters

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The DCF analysis is based upon computing the free cash flows (FCF) for the upcoming years, therefore we need to estimate those first. Using the two revenue growth rates in the first 5 and the second 5 years and the EBIAT margin of 16%, we arrived at EBIAT values for the full projection period of 10 years. To estimate the EBIT, we used the common method of projecting the D&A by taking its percentage of sales from the year prior the acquisition, namely 5.3%, thus arriving at the EBIT values; also used the same method for estimating the capital expenditures for the projected period (6.78% of sales). For corporate tax, we used 40%, as such a percentage is common for the US. For the net working capital (NWC) calculation, we needed the current assets and current liabilities, so similar to using the provided asset intensity of 29%, provided in the instructions; we used percentage of sales of current liabilities form 1993, as a constant percentage throughout the projected period. Thus, we arrived at values both for current assets and liabilities, and consequently at the changes in the NWC. Finally we computedˡ the values for the FCFs (See Appendix 1, sheet “DCF”). Finally, in the DCF analysis we performed a sensitivity analysis for the Enterprise Value (EV) of the company (See Appendix 1, sheet “Sensitivity Analysis”). To do so, we computed the range of Present Values (PV) of the FCFs, using the given discount rate range (12% - 18%) and the range Terminal values, using the given growth rate range in perpetuity (2% - 6%). We ˡFCF=EBIT - tax + D&A - CAPEX-Changes in NWC

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Record Masters's DCF analysis,

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The DCF analysis is based upon computing the free cash flows (FCF) for the upcoming years, therefore we need to estimate those first. Using the two revenue growth rates in the first 5 and the second 5 years and the EBIAT margin of 16%, we arrived at EBIAT values for the full projection period of 10 years. To estimate the EBIT, we used the common method of projecting the D&A by taking its percentage of sales from the year prior the acquisition, namely 5.3%, thus arriving at the EBIT values; also used the same method for estimating the capital expenditures for the projected period (6.78% of sales). For corporate tax, we used 40%, as such a percentage is common for the US. For the net working capital (NWC) calculation, we needed the current assets and current liabilities, so similar to using the provided asset intensity of 29%, provided in the instructions; we used percentage of sales of current liabilities form 1993, as a constant percentage throughout the projected period. Thus, we arrived at values both for current assets and liabilities, and consequently at the changes in the NWC. Finally we computed the values for the FCFs (See Appendix 1, sheet DCF).Finally, in the DCF analysis we performed a sensitivity analysis for the Enterprise Value (EV) of the company (See Appendix 1, sheet Sensitivity Analysis). To do so, we computed the range of Present Values (PV) of the FCFs, using the given discount rate range (12% - 18%) and the range Terminal values, using the given growth rate range in perpetuity (2% - 6%). We arrived at a range between $6.4 and $14.5 million, with a mean of $9 million.With the intention of comparing this range of EVs to a different method of valuing the company, we made a Precedent Transaction Analysis, using the multiples EV/EBITDA and EV/Sales of the companies Bekins and Bell + Howell (See Appendix 1, sheet PTA). Using Record Masters EBITDA and Sales from 1993 (year prior acquisition), we arrived, correspondingly, at a range of values for EV/EBITDA: $11.4 to $16.1 million with a mean of $13.7 million and for EV/Sales: $11.8 to $16 million with a mean of $13.9 million. As expected the valuation from the PTA analysis turned out to be higher than the one from the DCF, due to the fact that the acquisition prices take into account the anticipated synergies form the deal.

FCF=EBIT - tax + D&A - CAPEX-Changes in NWC