Discounted Cash Flow
• Follow the instructions starting at the bottom of page 264 in the Fourth Edition, 266 in the third edition of the textbook.
• Since you already have 3 years of projected EBIT, you do not need to do the calculations at the top of page 267 for years 1-3. You will have to estimate years 4 and 5 based on the growth rates of previous years.
• Pick an appropriate rate of return. The table at the top of page 265 should help with this.
• Divide your projected Year 5 EBIT by the rate of return you selected. This will give you the terminal value of the company at the end of Year 5.
• Discount all cash flows back to present value (follow the example at the bottom of page 267).
• Add all your present value cash flows together. The sum of these numbers is the value of the business using a discounted cash flow calculation (as explained on page 268)
Market Comparison Techniques
• Read the section starting on page 277 (4th edition)
• Exhibit 8 of the case has market value information from recent sales of non-public companies in the bottled water industry
• Notice the row titled “MV of Equity (Price)”. This tells you what the companies sold for. MDI: $3,656,418; FLD: $478,697; TS: $5,001,592; ESWC: $3,035,316; AWC: $1,376,660; EW: $8,000,000.
• Using the list of 12 characteristics starting on page 278, select the 1 or 2 companies that are most similar to PowerWater Beverages.
• Using the ratios at the bottom of page 277, compare those 1 or 2 companies to PowerWater.
• Using the sale price of the 1 or 2 comparable companies as a baseline, multiply the sale price of those companies by the difference in ratios between PowerWater and the comparable company (in other words, if the ratios I look at are twice as good as Essentia Water, I would multiply Essentia’s sale price ($8MM) by 2 to get the comparative value of PowerWater). This number becomes your market comparison value.
• Find the Total Assets of PowerWater Beverages at present (End of Initial Year on balance sheet).
• Subtract the total liabilities
• This is the value of the company if they sold all their assets and paid off their liabilities.
• Now that you have 3 difference valuations (discounted cash flow, market comparison, liquidation), arrange these values highest to lowest.
• Understand that, in the real world, you would have multiple scenarios for each valuation accounting for different projections which would reflect a best-case scenario, worst-case scenario, and most-likely scenario.
• Considering that none of these valuations are perfect, make a decision about what the best valuation would be. It should, obviously, fall somewhere between your highest and lowest value.
• Explain to me why you ended up at that valuation.