Answer To: BA540 Winter 2022 Final Group Project This case mirrors the many aspects of business valuation...
Tanmoy answered on Mar 13 2022
MOVEFREE, INC.: Acquisition of Ortholuv.com 1
MOVEFREE, INC.: Acquisition of Ortholuv.com 8
MOVEFREE, INC.: ACQUISITION OF ORTHOLUV.COM
Table of Contents
Introduction 3
Analysis 4
Conclusion 11
References 12
Introduction
MoveFree Inc. is an apparel company and is experiencing slow growth rate along with poor profitability for the past few years. This was essentially due to the advent of covid-19 global pandemic combined with enhanced competition and saturation in the market. The CEO of the company, Rylee Farah proposed for acquisition of a firm and add it in its business. For this acquisition process they chosen Ortholuv.com. She also stated that due to this acquisition the stakeholders will be motivated to stay associated with MoveFree Inc and the company will eventually be able to generate huge profits and growth.
Ortholuv.com is a private company which manufactures orthopedic shoes and other products which are related to orthopedics. These shoes are very comfortable due to the ortho-designs. Further, the market for orthopedics shoes is stable, Rylee see great opportunity as the ortho-shoes are comfortable and are high performance due to its high quality.
Rylee and the management of MoveFree Inc. appointed a consultant for evaluation of the proposed acquisition of Ortholuv.com. But there is disagreement between the management of MoveFree, Rylee and the Board on whether the project should be accepted or not. We will discuss and evaluate the project based on the various merits and demerits the project can have if accepted by MoveFree Inc.
Analysis
Calculation of the discount rate appropriate for Ortholuv.com
Data from Case Table 1
2023
2024
2025
2026
2027
Sales Revenue
1,000.00
1,250.00
1,875.00
2,100.00
3,750.00
Investment in Capex and NWC
25
55
170
80
80
Depreciation
15
30
50
72
80
Interest payments
94.4
101.4
108.6
115.9
122.4
Data from Case Table 2
Current YTM on 30-year treasury bonds
2.50%
Current YTM on 3-month treasury bills
2.00%
Most recent 1-year return on S&P 500
5.30%
Estimated annual return on the S&P 500 for next 30 years
8.00%
WACC Estimate
Marginal tax rate
40%
Target Debt to Value Ratio
15.0%
Terminal growth rate
2.0%
Expected return on market
8.0%
30-year S&P average return
Rf
2.5%
To make buy decision 30-year T bond rate is used.
Rd
6.2%
Cost of borrowing
Market Risk Premium
5.5%
Data for comparable firm (Ortholuv.com):
Levered beta
1.5
Debt to Equity
0.75
Unlevered beta
1.034
Data for Ortholuv.com:
Unlevered beta
1.034
Target D/E
0.750
Levered beta
1.500
CAPM Re [(Re = Rf+ beta*MRP)]
10.75%
WACC
7.74%
Long Term Debt
$ 14,75,000.00
Equity =
$ 19,66,666.67
Total Capital =
$ 34,41,666.67
Weight of Equity=
57.14%
Weight of Debt=
42.86%
WACC = Weight of Eq*Cost of Eq + Weight of Debt*Cost of Debt(1-T)
Free Cash Flow Estimate
Marginal tax rate
40%
COGS as % of revenues
42%
SG&A as % of revenues
15%
Particulars
2023
2024
2025
2026
2027
Revenues
10,00,000
12,50,000
18,75,000
21,00,000
37,50,000
Less: COGS (depreciation already factored in)
(4,20,000)
(5,25,000)
(7,87,500)
(8,82,000)
(15,75,000)
Less: SG&A
(1,50,000)
(1,87,500)
(2,81,250)
(3,15,000)
(5,62,500)
Equals: EBITDA
4,30,000
5,37,500
8,06,250
9,03,000
16,12,500
Less: Interest Payments
(94,400)
(1,01,400)
(1,08,600)
(1,15,900)
(1,22,400)
Less: Depreciation (included in COGS)
-
-
-
-
-
EBT
3,35,600
4,36,100
6,97,650
7,87,100
14,90,100
Less: Taxes @ 40%
(1,34,240)
(1,74,440)
(2,79,060)
(3,14,840)
(5,96,040)
Equals: EBIAT
2,01,360
2,61,660
4,18,590
4,72,260
8,94,060
Add: Depreciation
15,000
30,000
50,000
72,000
80,000
Less: Investments in Capex &...