Assignment - Practical Finance for Bankers
Assignment Description
This assignment is meant to give you an understanding of finance by valuing the stock of a closely held company doing business as a C Corp. The assignment will require you to quantify risks and uncertainties, identify key financial relationships and determine the impact these have on the subject company's value. You will start with an actual bank client loan file along with financial statements that have been spread and analyzed using Moody's Analytics (a bank software program used by many banks' credit departments) and you will value Circuit Board Assembly, Inc. (CBA) using this information.
Use IRS Revenue Ruling 59-60 (RR 59-60), which governs all professional valuations, as your guide in preparing your valuation. A copy is included in your course materials. This assignment will require you to use all of your known and learned finance skills for this practical application.
Student Learning Objectives -
1. Understand that the goal of all business owners and the motivating factors behind their decisions is to build a viable company which enables the owners to establish and increase the Transferable Value (TV) of their firm.
2. Understand that building TV is the central idea of finance and its application in Financial Management.
3. Understand the roles that People, Processes, Promotion, Potential and Profits play in increasing TV.
4. Understand the valuation process so that you may become a confident bank advisor.
5. Understand how to illuminate the determinants of value creation and apply the proper multiples, cap rates and discount rates to properly recognize the quantification and classification of the company's risk class. This can only be accomplished by analyzing the firm's business, economic and financial risks within their industry and by using RR 59-60 and the other factors described below.
Valuation Scenario -
You have been asked to value Circuit Board Assembly, Inc. (CBA) and give your opinion as to its Fair Market Value (FMV). For purposes of this valuation you may assume the buyer is a financial buyer. The Valuation should be as of December 31, 2016.
You have been provided with the Credit Review and Analysis (CR) from PCBS Bank credit department. Please note-- PCBS Bank funded the new CBA loan in July of 2016. Management has prepared unaudited financial statements for year end 2016 and partially updated the CR for 2016, to facilitate your valuation of CBA. You are asked to study and analyze the CR and select relevant information to include in producing a Valuation Report. Use the financial information included in the income statements, balance sheets, statements of cash flow and ratios to support the financial analysis you present in your Valuation Report. Use all the CR information and numbers from the financial statements provided. You may also use the forecast prepared by Management for 2017, 2018, 2019 & 2020.
Background of Circuit Board Assembly. Inc.
Mr. Goodman and Mr. Flanagan (owners) purchased CBA in 2013 for $5.1 million and had an existing revolving credit and term relationship of $3.5 mm with Brand X bank. The new CBA owners have incorporated into a C corp. and approached PCBS Bank to request a line of credit and term facility to be used to provide funds for their planned expansion. The credit request was granted and the loans were funded in July 2016. The total exposure for PCBS bank is $3,875,000. This includes $3MM for a Revolving Line of Credit (RLOC) and $875M in Long-Term Debt with five equal principal repayments of $175,000 due each year. Goodman and Flanagan sought a new relationship with PCBS bank due to excessive loan officer turnover and high rates of interest being charged by Brand X bank.
You are asked to study the income statements, balance sheets and statements of cash flows and use this information, along with financial ratios and peer group ratio comparisons, to provide a financial analysis of the company. Show these ratios, explain their relevance, and state your observations and conclusions on the financial health of CBA. This information should be used as one of the cornerstones of your valuation and you should use it to indicate CBA's financial health and risk class. Include this information in your Valuation Report.
Please also consider the following additional information that may not be apparent when reading the financial statements:
1. Each owner has one child in college. CBA is paying the college expenses for the two children and also family members' travel. This totals a combined $150,000 annually.
2. Both owners have non-working relatives who look to Goodman and Flanagan for additional support. Health insurance coverage for these non-working relatives is paid for by the company and costs $30,000 annually. Assume these costs stay static through 2020.
3. A onetime change to real state - does it affect EBITDA.
4. Onetime changer to Healthcare - does it affect EBITDA.
Report Write-up -
The goal of any financial analyst in applying Revenue Ruling 59-60 is to gain an understanding of the company and to decide on its risk class and financial characteristics. Your report may be given to prospective buyers that have no experience with CBA. Therefore, your report must be organized to include elements important to prospective buyers of CBA and clearly explain how you reached the value of the enterprise and the value of the equity.
Write your report so that any prospective buyer could use your report as their basis for their Letter of Intent, which would state the offering price and terms, and serve as an agreement, in principle, for the purchase of CBA. The date of your valuation should be as of Dec. 31, 2016. Your valuation report will need to utilize all of the financially prudent tenets learned and discussed during the two weeks of class and follow the specific guidance provided in the following section. If you make Assumptions Not In the Credit Review, annotate by using the following acronym -- ANICR.
Valuation Report Content
A. Executive Summary: Purpose and Scope of CBA Valuation
Summarize the assignment, its purpose and the approaches you used to analyze the company and arrive at your valuation.
B. Develop and Explain your Financial Analysis of CBA
Use the financial information included in the income statements, balance sheets, statements of cash flow and ratios to support the financial analysis that you will use in your Valuation Report.
C. Develop and Explain Your Analysis of the Following Additional Factors:
1. RR 59-60 Section 4 (A-H) (See Ruling Attached)
2. Other Factors to be considered:
a. Size of company
b. Business Type
c. Past Growth
d. Growth Potential
e. Competition
f. Product
g. Brand Recognition
h. Management
i. Customer Base
j. Employee Quality
k. Infrastructure, Processes and Facilities
I. Market Place
m. Financial Comparisons to the Industry
n. Financial Buyer (assumption)
D. Define and explain the following risk/return rates used in determining a company's risk profile. Next, discuss the rates you have selected and will apply to CBA, based on the factors in C above.
a. Capitalization Rate/ Discount Rate
b. Minimum acceptable rate of return (MARR)
c. Weighted average cost of capital (WACC)
d. Capital asset pricing model (CAP M)
e. Return on Investment (ROI)
f. Internal rate of return (IRR)
g. EBITDA Matrix
h. Industry Price/earnings ratio
E. Develop and explain your conclusion of Fair Market Value by using the risk rate measures you have developed for CBA (and discussed in D above) and apply them to the relevant financial information in the CR and financials on CBA.
Explain the Enterprise Value and the value of the equity and, therefore, the Fair Market Value of the common stock of CBA and how the value was reached and methods used. Use at least three of the following methods in valuing CBA and explain each.
a. MARR-Multiples of EBITDA
b. Capitalization of Net Profit After Tax
c. Capitalization of Free Cash Flow
d. Liquidation Value (Orderly v. Auction)
e. Industry P/E Ratios
f. Discounted future cash flow/Earnings
Attachment:- Assignment File.rar