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At what price would you offer a firm for valuation

Problem:

How many shares and at what price would you offer a firm whose valuation is:

Valuation using P/E, Price/Sales, and Price/Cash Flow Ratio

Industry Average

35*40=1,400 is P/E

750*2=1,500 is Price/Sales

85*20=1,700 is Price/Cash Flow

Starbucks

52*40=2,080 is P/E

750*3.75=2,813 is Price/Sales

85*28=2,380 is Price/Cash Flow

Here's the scenario if it helps.

Helen Troy started a Teabucks Teashop in Troy, Michigan a few years ago. She formed a corporation, and owned all the shares of this corporation. She played various roles as the CEO and a cashier. Fortunately for Helen her teashop became very popular and her firm grew at a very rapid pace. She expanded her business to all the big cities. She added more staff and even hired a MBA graduate from the University of Michigan. The firm has negligible debt, and all the growth has been financed with equity. The stock was owned by only a few individuals and hence a privately held corporation. Therefore no market price has been established for the stock. Now she wants to expand into tea packaging and tea bottling operations, which require large investment outlays. So Helen decided to take her company public. Valuation of a privately held firm requires:

1. An understanding of the PE ratio and its use in valuation

2. An understanding of discounted cash flow methods and their application in valuation

3. Using the growth rate to estimate future cash flows

4. Using CAPM to calculate the discount rate using value from a proxy firm

5. Knowledge of financial markets and the registration procedure for issuing securities to the public

6. Knowledge of the Internet and how new securities can be issued through the Internet.

Teabucks Income statement (in $Million and rounded to nearest million)

Total Revenue 750

Costs of goods sold 575

Gross profit 175

Selling and Administrative expenses 40

Depreciation / Amortization 45

Other expenses 25

Income before taxes (EBIT) 65

Taxes (38%) 25

Net Income 40

The valuation will provide necessary information to price the IPO.

Now Priced at $20 (50% Discount)

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