Tag: DCF

Assume the perspective of a Risk Officer and compose a memo for the specialist venture debt bank outlining why a Management Buy-Out (MBO) is an attractive option for managers. Identify and explain the specific risks of providing debt to Monsoft? How could the bank mitigate these risks?

Corporate Reporting & Finance

Background

Monsoft is an established fintech that provides back-office/ administrative software for banks to manage customer mortgages. The company has 8 clients in total with 3 of the top 10 UK banks using their software.

The company was founded by Tim Bennis, who serves as both CEO and CTO. Currently the software is sold through multi-year licences, which are deployed on Monsoft’s customers own servers, however Monsoft also has plans to sell its product through the software as a service model (SaaS). Tim estimates that this would cost £3m and take 12-18 months to implement, the move to a SaaS model will likely increase the value of the company by 50%.

Ownership: Tim owns 30% of the shares in the company with the remainder held by various venture capital firms, the largest of which is a small UK venture capital fund, Growth Partners that owns 40%. Each of the other shareholders own approximately 10% and are not aligned with Tim or Growth Partners

Shareholder Exit: Growth Partners is nearing the end of its lifecycle and has failed to raise a subsequent fund, so needs to sell its 40% shareholding in Monsoft for cash to its investors rather than take additional equity stakes. There are three financing options currently available: acquisition by a high growth fintech, sale to a private equity firm and a management buyout.

see ‘this screenshot’ for information on Plutus and Valuation Guidance

REQUIREMENTS

A: Business Valuation

Compose a memo to the Board of Directors of Monsoft covering the following topics:

1. Calculate the 2022 value of Monsoft by applying the following three methods:

1. Discounted Cashflow (DCF) with terminal value based on Price/Sales multiple applied current TTM

(Trailing Twelve Month) revenue

o The DCF will use the forward years projections up to 2024

o Assume that there is no depreciation, investment, or interest but if there is a tax liability, that

is, if the company is profitable – assume the UK corporate tax rate is 19%

2. Forward P/E valuation, – Apply the same assumptions as for the DCF to determine what an implied
post tax earnings figure would be for Monsoft in 2022 and apply the relevant PE multiple

3. Price/Sales

Include an advantage and disadvantage of each valuation technique

2. Assuming Plutus hits the $20m revenue target and the new revenue multiple is applied, calculate the value in GBP of the equity stake the owners of Monsoft would have in Plutus.

3. Compare and contrast the Plutus and Victors offers from Tim Bennis and Growth Partners perspective? Using the
information provided, suggest an alternative scenario whereby both Tim Bennis and Growth Partners goals
can be met and Monsoft has sufficient funding for its growth.

4. Describe the specific sectoral considerations when valuing a software company and to provide a recommendation
on what a reasonable value the company should be based on your calculations and research

Consult the following resource:

B: Business Financing

Assume the perspective of a Risk Officer and compose a memo for the specialist venture debt bank outlining why a Management Buy-Out (MBO) is an attractive option for managers. Identify and explain the specific risks of providing debt to Monsoft? How could the bank mitigate these risks?

Calculate the Discounted Cash Flows (DCF) for 10-years and derive the Net Present Value using the uncertain input variables.

Discounted Cash Flow Modelling and Sensitivity and Risk Analysis

For the purpose of this coursework, you are required to do the following:

1. Calculate the Discounted Cash Flows (DCF) for 10-years and derive the Net Present Value using the uncertain input variables. (5 Marks)

2. Perform a single simulation of 10,000 iterations for the NPV model and determine the probability of getting a negative (zero) NPV at 95% Confidence Interval (2 Marks)

3. Perform sensitivity analysis for the NPV output to determine the variable with the largest impact on NPV (Biggest Driver of NPV) using the following:

a) Change in Output. (2 Marks)

b) Regression Coefficient. (2 Marks)

c) Correlation Coefficient. (2 Marks)

2

d) Contribution to Variance. (2 Marks)

Total (15 Marks)

Write a Report to your COO to communicate the findings from your analyses. The report should describe the purpose and result of your analyses

What is your assumption about financing of capex and change in working capital??What model you would like to use stable growth, two periods or three period growths???

Finance valuation of En+ group

The Final Assignment

1. Find and download financial statements for 5-7 years.  put the data in excel file. Put Income statement data (for different years in one sheet, the balance sheet data in another, the same for the cash flow data… make sure that data are consistent through year (so that you can do horizontal analysis)

2. In addition download market data for the target (P/E, MV/BV, stock prices) + multiples for similar firms (peers)

The idea is

• Value your company by two methods
1) Discounted CF method
2) Relative valuation (using multiples)

• Compare your results with the market price

 

For discounted cash flow approach
• What model you would like to use stable growth, two periods or three period growths??? To decide you need to check if company is mature or growing.

• In case you see that the company’s current growth (EPS, sales) above 2%-3% (above the industry average, fluctuate a lot) you have to use either two or 3 stage growth model

• Project cash flow for the period of unstable growth (use percentage of sale method to project financials)

• Estimate the terminal value at the end of the period of unstable growth ( using formula for growing perpetuity)

• Think of the discount rate you would like to use to compute PV of cash flow. Different rate for different stage of growth? Or the same???

• Remember discount rate will depends on the capital structure of the firm, (If country significantly changed its D/E ratio in recent period you

have to use industry average as a target structure and use it for calculation of discount rate for stable growth period) You may ned to adjust cash flow as well to reflect this changes

• Do not forget to make assumptions about growth rate of capex, depreciation in different periods of growth (you might look at industry peers data). They should align with your projections of sales.

• What you would like to value 1) entire firm (FCFF) or only equity part (FCFE or Dividend)

• Use WACC for firm valuation, required rate of return for equity for equity valuation
For equity valuation

• Dividend discount model or) Free cash flow to the equity.

• This depends on if company pays dividends, whether they are stable and some other factors ( imagine you purchase a big stake of the equity and you can influence the firm decision on dividends, in this case you should use FCFE)

• How to estimate the growth rate of dividend and growth rate of FCFE (ratios using historical average, industry average)

• What is your assumption about financing of capex and change in working capital??

• After computing value of equity you will add MV of debt to get your own estimate of the value of the firm. Remember you will compute enterprise value (PV (Future CF to the equity)+Debt)).

Valuation of FCFF will give you the enterprise value.

• If your company change its capital structure one way to avoid mistakes is to use FCFF, (at least you do not need to adjust FCFE)

• Still if you think that the current capital structure will not sustain in the future you should adjust WACC.

• To compare your results with market value

• Market price of the stock x Nmb of stocks outstanding + MV(Debt) – Cash =Enterprise value

For relative valuation, you need to do is to decide which multiple is more relevant in your case.

Questions to keep in mind

• Equity multiples versus Firm multiples

Rem: Firm value multiples allow for direct comparison of different firms, regardless of capital structure.

• EBITDA (both equity of firm)multiple is one of the most commonly used valuation metrics, as EBITDA is commonly used as a proxy for cash flow available to the firm.

• When a company has negative EBITDA, the EBITDA and EBIT multiples will not be material. In such cases, Sales multiple may be the most appropriate multiple to use.

• When depreciation and amortization expenses are small, as in the case of a non-capital-intensive company such as a consulting firm, EBIT and EBITDA will be similar.

• For the sake of consistency (because you want to compare both DCF and relative valuation results), if you value FCFF, use the multiples that estimate the value of the firm, if you estimate the value of equity FCFE, use the equity multiples.