You will need to estimate future cash flows for a firm and then apply discounted cash flow analysis to estimate the value of a firm. You will then need to decide if you would sell the firm at a specific price. 1. Organic Micros was established 8 years ago by Mary Mendoza. The firm reported EBIT this year of $80,000. Mary typically reports about $2,000 in personal expenses through the firm each year. She also pays herself a salary of $60,000 despite the market rate for such a position being closer to $30,000.
2. The firm currently reports $10,000 in depreciation expenses every year.
3. The firm will need $25,000 of inventory replaced in year 1 and will also require the replacement of equipment during year 4 in an amount totaling $50,000.
4. The firm currently has outstanding debt of $400,000. The firm has been historically financed in a way that 30% of funds are a result of debt financing. The cost of this debt financing is estimated to be 12% while the cost of equity financing is estimated at 22%.
5. Mary originally invested $120,000 of her own funds in the firm which establishes a cost basis for the firm of $120,000. Mary typically falls in a tax bracket that results in a total tax rate of 40%.
6. Based on the firm’s maturity and the state of the industry, it is estimated the EBIT will increase by 9% each year for the next 5 years. Beyond this time frame, a reasonable estimate of growth is neither possible nor relevant.
Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 NAME Official EBIT Owner's Salary Reasonable Salary Depreciation Personal Expenses Estimated EBITDA New Equipment Inventory Investment Free Cash Flow Current EBIT Owner's Salary Reasonable Salary Depreciation Personal Expenses New Equipment Inventory Investmer Estimated Growth R Tax Rate Weight Of Debt Weight Of Equity Cost Of Debt Cost Of Equity WACC Terminal Value CF1 CF2 CF3 CF4 CF5 NPV Value Of Firm Basis Of Firm Gain Taxes Owed Value Of Debt Net Proceeds Sell For $900k? Sell For $700K?