FINANCIAL MANAGEMENT

CASE STUDY #2: WHAT ARE WE REALLY WORTH?

Submitted to:
Mr. Johnel Fil Arcipe

Submitted by:
Constantino, Welshfyn
Dela Raya, Franz Ghynelle
Gaturian, Helery Joy
Orolfo, Dipsy
Villa, Mejoy
Yap, Lynnel

March 10, 2021

1. What are the advantages and disadvantages of going public? Do you agree with Dan’s
concerns or do you concur with the other members of the Short family regarding the
issuance of an IPO? Explain why.

ADVANTAGES DISADVANTAGES
 Fundraising  Additional Regulatory Requirements
 Exit Opportunity And Disclosures
 Publicity And Credibility  Market Pressures
 Reduced Overall Cost Of Capital  Potential Loss Of Control
 Stock As A Means Of Payment  Transaction Costs
https://www.ipohub.org/ipo-advantages-disadvantages/
It was mentioned that Citrus Glow International would like to keep growing and expand
their product line. In order for them to raise capital quickly, which is the primary benefit, they
must consider going public. Raised capital can be used to further the business and expanded
product line for them to stay ahead of their competitors. Going public will not just provide them
large number of investors, but also with many opportunities for publicity and media coverage.
Their products will be known to a new group of potential customers and receive more feedback
and testimonials to know customer needs and satisfaction. Subsequently, this may lead to an
increase in market share for the company. An IPO also may be used by founding individuals as
an exit strategy. Many venture capitalists have used IPOs to cash in on successful companies that
they helped start-up.
Deciding whether to go public will not only give them enormous opportunities to grow,
they also have to deal with the drawbacks and challenges associated with it. One major drawback
is time and expenses. Public companies are required to file their financial statements with SEC
every year. Complying with these SEC regulations are both burdensome and costly, especially
for smaller companies. Additionally, focusing on the IPO process could cause other areas of the
business to suffer. Once the company goes public, management losses some of its freedom since
shareholders gain significant ownership in the company and they might take this opportunity to
override management decisions or get rid of the directors and other officers.
Before deciding whether or not to go public, Citrus Glow International must evaluate all
the potential benefits and drawbacks that may arise going through the process and once they are
public. As for me, I think that they should consider going public. Their sales have increased and
so are their expenditures. As said earlier, going public will help them raise capital quickly and
expose both the company and the products to potential customers without exerting effort on the
marketing strategy alone.
2. Comment on Lisa’s preference of the Corporate Value Model. Based on her approach,
what would Citrus Glow’s selling price per share if they were to issue 30 million shares?
Given:
EBIT = 95,296,875
Tax rate = 40%
RFR = 4%
MRP = 8%
# of outstanding shares = 30,000,000
Growth rate = 6%
Market Value of Debt, 2004 = 66,718,750 -> (13,343,750 + 53,375,000
Depreciation Expense, 2004 = $9,703,125
Capital Expenditures = $26,604,850 -> (97,031,250 – 70,426,400)
Net Working Capital
2003 2004
$57,621,600 $64,687,500
Current Liabilities 8,609,600 13,343,750
49,012,000 51,343,750

Change in Net Working Capital = 2,331,750 -> (51,343,750 – 49,012,000)

FCF2004 = (EBIT (1-t) +Depreciation and Amortization) – (Capital Expenditures + Change in Net Working Capital)
= [95,296,875(1 - 40%) + 9,703,125) – (26,604,850 + 2,331,750)
FCF2004 = 37,944,650

Cash Flow
FCF0 37,944,650
FCF1 37,944,650(1.20) 45,533,580
FCF2 45,533,580(1.10) 50,086,938

WACC = RFR (MRP x average beta)

= 4% (8% x (1.2+1.3+1.15/3))
WACC = 13.73%
 FCF (1+ g)
Horizon Value =
r s −g

50,086,938(1+ 6 %)
=
13.73 %−6 %
53,092,154.28
=
7.73 %
Horizon Value = $686,832,526.26

FCF n FCF n Horizon Value

Market Value = + n + n
1+r (1+r ) (1+ r)

45,533,580 50,086,938 686,832,526.26

= + 2 +
1+ 13.73 % (1+13.73 %) (1+13.73 %)2
= 40,036,560.27 + 38,723,482.20 + 531,007,647.20
Market Value = $609,776,689.67

Market value of firm−market value of debt

Value per Share =
¿ of oustanding shares
609,776,689.67−66,718,750
=
30,000,000
Selling price per share = $18.10
If the Citrus Glow’s selling price per share will be $18.10 if they will issue 30 million
shares.

3. How does Lisa’s price estimate compare with Dan’s price estimate based on the price-
ratio models? What are the pros and cons of Dan’s preferred approach?

Table 1

Company A Company B Company C Average multiple

Price/Earnings 23.6 24.6 22.8 23.7
Price/Book 7.7 12.1 4.2 8.0
Price/Sales 2.9 2.8 2.9 2.9
 Price/Cash flow 13 16.7 14.7 14.8

Table 2
1-year Estimated Price per
Compoun ahead value at the share
Current d growth Projected end of the Estimated (30
level (2004) (4 years) level year value today million)
1,632,260,28
Net income 52,374,375 49.77% 78,440,452 1,856,424,030 5 54.41
Owners'
Equity 95,000,000 39.62% 132,638,470 1,061,107,762 932,978,689 31.10
500,000,00 1,881,241,56
Revenue 0 49.27% 746,371,655 2,139,598,744 9 62.71
1,183,558,69
Cash Flow 62,077,500 46.51% 90,952,754 1,346,100,760 9 39.45
Average = 46.92

N =1  
Rs = 13.73%  
Beta = 1.22  
Risk-free rate = 4%  
Market risk premium = 8%  
   
Number of shares to be
issued 30,000,000
Average price per share 46.92
Total value of owners'
equity 1,407,509,810

Dan's estimate, based on the price per share ratio method, is between $31 and $63 with an
average of $47, while Lisa's estimate is $57.91. The value of a company is measured using Dan's
method based on the relative valuation ratios of the company's top three competitors. As a result,
the value will be more rational. Furthermore, only one-year growth estimates are required,
decreasing forecasting error. Beta and required return estimates, on the other hand, are still
necessary.
The pros are: it is simple to calculate, well-known and commonly used, forecasts are
taken into consideration and earnings is a metric that measures how much money is made
available to shareholders. Whereas, the cons are: it does not take into investment returns and debt
or financial structure into consideration, different accounting practices of different organizations
and countries make comparisons difficult, earnings are especially vulnerable to tampering and
poses difficulties in measuring quality of earnings.

4. How far off would Joe’s price estimate if he were to issue a 3-stage approach with growth
assumptions of 30% for the first 3 years, followed by 20% for the next 2 years, and a long-
term growth assumption of 6% thereafter. Assume that the firm pays a dividend of 1.50$
per share at the end of the first year.
GIVEN: D0= 1.5
Rs= 13.73%
YEAR GROWTH ASSUMPTION DIVIDENT DURING NON
CONSTANT GROWTH
PHASE
1 30% 1.95
2 30% 2.535
3 30% 3.296
4 20% 3.954
5 20% 4.745

D1=1.5(1+.3)1
= 1.95 Terminal Value after 5 Years
= D5 * (1 + g) / (WACC – g)

D2=1.95(1+03) = 4.75 * 1.06 / 0.12 – 0.06

=2.535 = 4.745 * 1.06 / 0.06

= 5.030 / 0.06

D3=2.535(1+.3) = 83.83

= 3.296 Current Market Price

=1.95 / 1.12 + 2.535 * (1.12)Ä +
3.296 * (1.12)Å + 3.954 * (1.12)Ç
D4=3.096(1+.2) + 4.745 * (1.12)É
=3.96 = 58.86

D5=3.96(1.2)
=4.745
5. Based on all three estimates and on the valuation figures for the three competitors how
much per share do you think that Citrus Glow is really worth? Explain your rationale.
As a conclusion, we can take the average of all three models, since each has advantages
and disadvantages in comparison to the others, and we can't determine which model determines
the correct price. Since a non-publicly traded firm does not pay dividends, we must estimate the
Dividends for the DDM. The Corporate Value Model (Free Cash Flow model) has it´s limitation
regarding to the spending today and not in the past. On the other hand, the ratios of each entity
are need to be compared to similar others in the industry when the price-ratio model is used, in
which would be quite difficult if Citrus Glow has the biggest market shares.
Lisa’s Estimate $18.10 Corporate Value Model
Dan’s Estimate $46.92 Price per share ratio Model
Joe’s Estimate $58.86 Dividend Discount Model
Average $41.29

Company A Company B Company C Citrus Glow

Market prices $62.47 $57.29 57.30 $41.29

Since the 3 estimates are calculated using different models and so, the group believe that
getting the average of the 3 estimates would be fine to use to calculate the price per share of the
company. As a result, the group got the answer of $41.29 per share and also, the price is in line
with the current market prices of the competitors.