Problem:
Vulture Partners, a private equity organization specializing in distressed company investing, was interested in purchasing a company called Turnaround. Mr. Fang, a general partner at Vulture, made the following projections to value Turnaround ($mm):
|
|
Year 1 |
Year 2
|
Year 3
|
Year 4
|
Year 5
|
|
Revenue
|
200
|
210
|
220
|
230
|
240
|
|
Costs
|
(100)
|
(105)
|
(110)
|
(115)
|
(120)
|
|
EBIT
|
100
|
105
|
110
|
115
|
120
|
|
D NWC
|
+3
|
+3
|
+4
|
+4
|
+5
|
Turnaround had $220 million of net operating losses (NOLs) that were available to offset future income. At the beginning of year 1, the company had $75 million of 8% debt (coupon & yield) which was expected to be repaid in three $25 million installments beginning at the end of year 1. The relevant tax rate is 40%. Mr. Fang believed that an appropriate unlevered beta for Turnaround was 0.8. The long-term treasury yield was 6.5 percent and the market risk premium 7.0%. Net cash flows were forecast to grow at 3 percent per year in perpetuity after year 5. Calculate the APV of Turnaround and do a sensitivity analysis on the perpetuity growth rate at 2 and 4 percent.
Also, will you use excel formulas in your solutions/answers or will provide everything calculated using non-excel formulas?