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CHAPTER 9
c. The MAP increases 116 percent when the discount rate falls one
percentage point and the perpetual growth rate rises by the
same amount. Plausible changes in the discount rate and the
perpetual growth rate can cause large changes in estimated
firm value. This is especially true when the initial rates are
similar.
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c. An acquisition appears feasible; the owner's minimum price is
less than the buyer's maximum.
8. a. Negative free cash flow simply means that the company will not
be able to fund all worthwhile activities in that year out of
operating cash flows and needs to raise capital from outside
sources. Negative free cash flows are usually associated with
growing companies.
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
shareholders is a 90% chance at $0 and a 10% chance at $50,
which has an expected value of $5.
10. The median and mean values for Scotts’s peers appear below.
Here are my indicators of value for Scotts. In coming to these numbers, I believe
that Scotts’s somewhat higher historical and projected growth rates, combined with
dominant positions in its chosen markets,warrant numbers that are in the upper half
of the indicated valuation ranges. However, the company’s somewhat smaller size
suggests some caution. I have selected multiples for the first two ratios roughly 10
percent above the sample median and 5 percent above the mean. Scotts’s mediocre
gross margins, especially for a company that dominates its markets, suggest that
investors will pay less per dollar of sales for Scotts than for peers, resulting in lower
than average multiples for the next two ratios. I have chosen representative
multiples for the last two ratios.
The implied value of Scotts’s common stock for each indicator is:
© 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Looking at these numbers,my best guess of a fair price for Scotts’s shares on
November 1, 2007 is$33.00. I think $29.88 is the best single estimate, but because
all of the other estimated values are above this figure, I have raised my best guess by
about 10 percent. $33.00 compares to an actual price on the valuation date of
$38.69, so my estimate is about 17 percent low, within my notion of the tolerances
inherent in business valuation. Many other estimates are, of course, possible.
12. Price per share = $5 million/400,000 shares = $12.50 per share. Pre-money value =
1.6 million shares X $12.50 = $20 million. Post-money value = 2 million shares X
$12.50 = $25 million. Alternatively, post-money value = pre-money value +
$5million = $25 million.
© 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
14.
© 2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.