1. MarineCo manufactures, markets, and distributes recreational motor boats. Using discounted free cash ?ow, you value the company's operations at $2,500 million. The company has a 20 percent stake in a nonconsolidated subsidiary. The subsidiary is valued at $500 million. The investment is recorded on MarineCo's balance sheet as an equity investment of $50 million. MarineCo is looking to increase its ownership. The company's marginal tax rate is 30 percent. Based on this information, what is MarineCo's enterprise value? If new management announced its plan to sell the company's stake in the subsidiary at its current value, how would that change your valuation?
2. You are valuing DistressCo, a company struggling to hold market share. The company currently generates $120 million in revenue, but its revenue is expected to shrink to $100 million next year. Cost of sales currently equals $90 million and depreciation equals $18 million. Working capital equals $36 million and equipment equals $120 million. Using this data, construct operating pro?t and invested capital for the current year. You decide to build an as-is valuation of DistressCo. To do this, you forecast each ratio (such as cost of sales to revenues) at its current level.
(a) Based on this forecast method, what are operating pro?ts and invested capital expected to be next year?
(b) What are two critical operating assumptions (identify one for pro?ts, and one for capital) embedded in this forecast method?
(c) Assume NOPLAT is expected to grow at 6%, ROIC equals 16%, and the weighted cost of capital is 10%. Using the key driver formula in chapter 2, what is the enterprise value for the company?