Commercial Fixture Essay

Suggested questions for the Commercial Fixtures Inc. case are prone below.1. What would you as an outside third party bid under the same conditions (with the same information) for the entire family (both halves)? Why?2. What do you expect Albert Evans to bid for Gordons half interest? Why?3. What should Gordon Whitlock bid for Alberts half interest? Why?4. How would you structure the purchase of the patronage?Question 1 is a business evaluation question. There are a number of ways to estimate the evaluate of a business. You seduce probably covered one or more of these ways in a previous class. The succeeding(prenominal) two pages review a few of the various ways to go about it.For a entailmented CF cuddle of valuing Commercial Fixtures Inc., I will use the following templateVALUATION APPROACHES OVERVIEW/REVIEW1. parallel Trades Analysis Using valuation ratios, or multiples of comparable firmsUse one or more valuation ratios, which include (a) Price-Earnings (b) Market-Book (c) Price-CF (d) Price-Revenues (e) Enterprise revalue to EBITDA, and (f) Other ratios. The prospective value (price) of the subject firm is quantified intoand compared withone or more of the valuation ratios of its peers. The better the performance of the subject firm relative to comparable firms in the relevant performance measures (as measured by operating ratios), the higher the appropriate valuation ratio for the firm (and vice-versa).2. liquidation Value, aka Book Value approachPlace liquidation values on the net working gravid and fixed assets of the firm. Include tax write-off benefits, if any. This approach is rarely useful, and will typically serve as a minimum value (unless the firm is in severe distress).3. (i.) Discounted Present Value of the Firms Free Cash Flows commonly referred to as DCF Valuation, or WACC valuationValue of the Firm = PV of future isolated coin flows + PV of terminal valuea.Estimate the first 3 to 10 years free cash flows and imagine the PVs . (A fivesome year horizon is common, but this can vary.) Typically you will use the WACC as your throw out rate. Depending on the circumstances, the estimated cash flows may be available for fewer than five years, or more than five years.b.Estimate the PV of the terminal value. One estimate for the terminal value involves assuming perpetual cash flows after the sign time horizon, e.g. i.If the cash flow after 5 years is expected to grow at a rate g for the foreseeable future storehouse Value5 (TV5) = FCF6 /(k g) = FCF5 (1+ g) / (k g)., where k is the required rate of return. You must discount the TV to time 0, and then add this to the PV of the FCFs during the projection horizon. ii.If the cash flow at the end of 5 years is not expected to grow, i.e., g=0, then the general formula collapses to the PV of a no-growth perpetuity Terminal Value5 = FCF6 / (k-g) = FCF5 (1+ g)/(k g) = FCF5 / kc.Use the Value of the Firm equation above, i.e. sum PV of free cash flows + PV of termina l value . The Value of the firms Equity = Value of the Firm Debt Currently Outstanding.3. (ii.) Adjusted Present Value approach we will only briefly discuss this approach a topic for a future pay course.4. Comments on Valuing the Firm using DCF (or WACC) and APV valuation approachesa.Watch the free cash flows (not reported earnings)In particular, as in the capital budgeting decision processDepreciation charges are not cash outflows.Investment in freshly property or equipment is a cash outflow.Increases in net working capital are cash outflows.Taxes are cash outflowsb.Do not subtract interest expense from FCFs.We want to estimate a value for the whole business. The return to creditors is reflected in the discount rate used.c.Consider other factors, such as a regard premium or a lack of marketability discount. These are mentioned in your textbook, and we will discuss these in class.d.Notice the esthesia of your estimated firm value to changes in assumptions, particularly the perp etual terminal growth rate, and the discount rate. Typically a range of firm values is calculated from various ranges of these two rates (as suggested in the template on p. 1), particularly when uncertainty is high.