Valuing a business is a difficult process. Any mathematical valuation is really only the starting...

Question

Valuing a business is a difficult process. Any mathematical valuation is really only the starting point of a negotiation between a buyer and seller. The actual value of any asset is really what a buyer and seller agree to pay each other.

Read the Aquarius Ales case study. The Green's have decided to sell their business but they have a price in mind that differs from the price offered by the potential buyers. Valuing a private company is a difficult issue but there are ways to develop comparisons. According to Rogers, the return on equity that an owner of a privately held company must receive is as much as 25% to 30% higher than a publicly held equity investor must receive. This is due to the fact that there is much less financial information about comparable private companies as well as because the liquidity of a privately held company's stock is much lower.

In particular one of the challenges in valuing the business is developing an discount rate or Weighted Average Cost of Capital (WACC) for your valuation model. The WACC formula is:WACC= %debt on balance sheet x cost of debt x (1-corporate tax rate) + %equity on balance sheet x cost of equity.

The key to solving this is developing the cost of debt and the cost of equity. The cost of debt is fairly easy to derive since you can see how much interest was paid by the company and figure out the interest rate paid to the lender. The corporate tax rate is also something that can be determined. Deriving an appropriate cost of equity takes a little more work. Consider some of the competitors both public and private and the returns on equity they generate.

When writing your paper consider the following questions:

1) What competitive advantages does Aquarius have? Are the advantages sustainable?

2) What is an appropriate discount rate (WACC) to use in valuing Aquarius?

3) What price should Aquarius sell for? Suggested process is:

A) Develop common size (percentages) income statements and balance sheets for Aquarius.

B) Use the percentages to develop pro-forma income statements and balance sheets.

C) Use the pro-formas to develop free cash flows for Aquarius. The free cash flow formula is (Revenues - Costs - Depreciation)(1-corporate tax rate)+Depreciation-incremental working capital-incremental capital expenditures.

Discount free cash flows to get a range of values for the business.

4) Is the Green's asking price reasonable?

The paper should be no longer than 3 pages in length with another 3 pages of exhibits attached.

na0003-pdf-eng-1-a2kcewlt.pdf na0003-pdf-eng-1-1bkouvau-4zahha12.pdf assignment-premise-m0jrctxn-rrdhfksn.docx

Himanshu · Accepted Answer

Price
	Exhibit 1 Aquarius Ales Balance Sheet					Common Size Income Statement				Percentage Change
	Assets	2004	2005	2006		2004	2005	2006		2005	2006			2007	2008	2009	2010
	Cash 	$   11,642	$   13,537	$   16,456		17%	17%	18%		16.28%	21.56%	18.92%		$   17,278.80	$   19,870.62	$   21,857.68	$   22,950.57
	Accounts Receivable 	$   2,006	$   2,483	$   2,822		3%	3%	3%		23.78%	13.65%	18.72%		$   2,963.10	$   3,407.56	$   3,748.32	$   3,935.74
	Inventory 	$   7,407	$   8,090	$   9,193		11%	10%	10%		9.22%	13.63%	11.43%		$   9,652.65	$   11,100.55	$   12,210.60	$   12,821.13
	Other Current Assets 	$   1,171	$   1,171	$   1,171		2%	1%	1%		0.00%	0.00%	0.00%		$   1,229.55	$   1,413.98	$   1,555.38	$   1,633.15
	Total Current Assets 	$   22,226	$   25,281	$   29,642		32%	32%	32%		13.75%	17.25%	15.50%		$   31,124.10	$   35,792.72	$   39,371.99	$   41,340.59
	Plant, Property and Equipment 	$   32,546	$   40,050	$   45,511		47%	50%	50%		23.06%	13.64%	18.35%		$   47,786.55	$   54,954.53	$   60,449.99	$   63,472.49
	Depreciation 	$   3,444	$   4,005	$   4,551		5%	5%	5%		16.29%	13.63%	14.96%		$   4,778.55	$   5,495.33	$   6,044.87	$   6,347.11
	Net PP&E	$   29,102	$   36,045	$   40,960		42%	45%	45%		23.86%	13.64%	18.75%		$   43,008.00	$   49,459.20	$   54,405.12	$   57,125.38
	Other Assets 	$   18,347	$   18,584	$   21,117		26%	23%	23%		1.29%	13.63%	7.46%		$   22,172.85	$   25,498.78	$   28,048.66	$   29,451.09
	Total Assets 	$   69,675	$   79,910	$   91,719		100%	100%	100%		14.69%	14.78%	14.73%		$   96,304.95	$   110,750.69	$   121,825.76	$   127,917.05
																			Free cash flow		(Revenue - costs-depreciation)(1-corporate tax rate)+Dep.

Valuing a business is a difficult process. Any mathematical valuation is really only the starting point of a negotiation between a buyer and seller. The actual value of any asset is really what a...

Answer To: Valuing a business is a difficult process. Any mathematical valuation is really only the starting...

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