Benito Gonzalez founded and grew the BioSystems Manufacturing Corporation over a several-year period. However, Benito has decided to harvest or exit BioSystems now at the end of 2010 with the intention of starting a new entrepreneurial venture. The Fuji Electronics Company is considering acquiring BioSystems, which is 60 percent owned by Benito Gonzalez; the other 40 percent of the equity is held by venture investors who also desire to exit the venture. However, while the venture is currently profitable, Benito believes BioSystems will be entering a period of rapid growth and increasing profitability. BioSystems' sales are expected to grow from the 2010 level at a 20 percent annual compound rate over each of the next three (2011, 2012, 2013) years. Cost of goods sold, marketing, depreciation, and interest expenses are expected to move or vary with sales (i.e., they are variable expenses). General and administrative (G&A) expenses are expected to remain constant each year (i.e., they are fixed expenses). The income tax rate is expected to be 35 percent.
A. Using the percent-of-sales relationships indicated above, prepare BioSystems' projected income statement for 2013.
B. Fuji Electronics has examined other recent acquisitions in BioSystems' industry and believes that a 17 times price-earnings multiple would be appropriate for valuing BioSystems. Calculate BioSystems' equity value at the end of 2013.
C. How much should Fuji Electronics be willing to pay for BioSystems Manufacturing at the end of 2010 if Fuji's management believes the appropriate discount rate is 25 percent?
D. What is Gonzalez's portion of the exit proceeds? What is the venture investors' portion of the exit proceeds?
E. Benito Gonzalez invested $50,000 of his own funds in BioSystems at the end of 2005. What would be the compound rate of return on his investment when the exit (sale to Fuji Electronics) from BioSystems occurs at the end of 2010?
F. The venture investors contributed $500,000 at the end of 2006. What would be their compound rate of return on their investment if BioSystems is sold at the end of 2010?
BIOSYSTEMS MANUFACTURING CORPORATION
INCOME STATEMENT FOR 2010 ($ THOUSANDS)
Net sales ................ $ 10,000
Cost of goods sold ............. 6,000
Gross profit ................ 4,000
Marketing expenses ............ 1,000
G&A expenses .............. 2,000
Depreciation ............... 200
Interest .................. 100
Income before taxes ............ 700
Taxes (35%) ................ 245
Net income ............... $ 455