Posted: November 2nd, 2015

Case 6: Gator Electronics

Case 6: Gator Electronics
Handout 1
Page 1
Copyright 2011 Deloitte Development LLC
All Rights Reserved.
Exhibit 1
Valuation Schedules: Gator Electronics Inc.
December 31, 20X3, ASC 350 Goodwill Impairment Analysis Summary — Step 1 Test (U.S. Reporting Unit)
$US in thousands
Reporting Unit
Fair Value of
Equity
Book Value of
Equity Step 1 Passed?
U.S. $ 990,000 $ 730,000 YES
Total $ 990,000 $ 730,000

Case 6: Gator Electronics
Handout 1
Page 2
Copyright 2011 Deloitte Development LLC
All Rights Reserved.
Exhibit 2
Valuation Schedules: Gator Electronics Inc.
December 31, 20X3, Income Approach: Discounted Cash Flow Method (U.S. Reporting Unit)
$US in thousands
FYE
12/31/20X4
FYE
12/31/20X5
FYE
12/31/20X6
FYE
12/31/20X7
FYE
12/31/20X8 Normalized Terminal
Revenue $ 1,325,000 $ 1,100,000 $ 1,140,000 $ 1,140,000 -7.2% $ 1,160,000 $ 1,290,000 $ 1,340,000 $ 1,380,000 $ 1,450,000 $ 1,450,000
Revenue growth -17.0% 3.6% 1.8% 11.2% 3.9% 3.0% 5.1%
Operating expenses 1,145,000 1,155,000 1,100,000 1,090,000 1,080,000 1,123,200 1,156,896 1,191,603 1,227,351 1,227,351
Operating income (EBITDA) 180,000 (55,000) 40,000 50,000 -47.3% 80,000 166,800 183,104 188,397 222,649 222,649
Operating income growth -130.6% 190.9% 60.0% 108.5% 9.8% 2.9% 18.2% 18.2%
Operating margin 13.6% -5.0% 3.5% 4.4% 6.9% 12.9% 13.7% 13.7% 15.4% 15.4%
Less: depreciation 33,125 27,500 28,500 28,500 29,000 32,250 33,500 34,500 36,250 36,250
Earnings before interest and taxes (EBIT) 146,875 (82,500) 11,500 21,500 -61.7% 51,000 134,550 149,604 153,897 186,399 186,399
Provision for income taxes 44,063 – 420 6,450 15,300 40,365 44,881 46,169 55,920 55,920
Debt-free income 102,813 (82,500) 11,080 15,050 35,700 94,185 104,723 107,728 130,479 130,479
Debt-free net income growth -180.2% 118.2% 137.2% 163.8% 11.2% 2.9% 21.1%
Debt-free net margin -7.5% 1.0% 1.3% 3.1% 7.3% 7.8% 7.8% 9.0% 9.0%
Cash flow adjustments: add/(deduct)
Plus: depreciation 33,125 27,500 28,500 28,500 29,000 32,250 33,500 34,500 36,250 36,250
Less: capital expenditures (30,000) (25,000) (30,000) (30,000) (25,000) (25,000) (20,000) (25,000) (36,250) (36,250)
Less: incremental working capital (4,000) (4,000) (5,000) (5,000) – – – – – –
Free cash flow to the firm $ 101,938 $ (84,000) $ 4,580 $ 8,550 -71.0% $ 39,700 $ 101,435 $ 118,223 $ 117,228 $ 130,479 $ 130,479 $ 134,394
Present value factor (mid-year convention) 0.9407 0.8325 0.7367 0.6520 0.5770
Present value of discrete cash flows $ 37,346 $ 84,445 $ 87,095 $ 76,433 $ 75,287
Total present value of discrete cash flows $ 360,606 Capitalization multiple 10.0000x
Present value of terminal value 775,452 Terminal value $ 1,343,937
Business enterprise value $ 1,136,058
Less: interest-bearing debt 150,000 Assumptions:
Equity value $ 986,058 Discount rate 13.0%
Depreciation rate 2.5%
Equity value (rounded) $ 990,000 Incremental working capital ra 0.0%
Long-term growth rate 3.0%
Corporate income tax rate 30.0%
* Two-year CAGR: Compound annual growth rate of key financial metrics.
** Figures based on income statement of the latest twelve months (LTM).
Pro Forma
LTM**
9/30/20X3
Two-Year
CAGR*
Entity Projections
Audited FYE
12/31/20X1
Audited FYE
12/31/20X2
Unaudited
LTM**
9/30/20X3
Case 6: Gator Electronics
Hanout 1
Page 3
Copyright 2011 Deloitte Development LLC
All Rights Reserved.
Exhibit 3
Valuation Schedules: Gator Electronics Inc.
December 31, 20X3, WACC Analysis (U.S. Reporting Unit)
$US in thousands
Description U.S. Notes
Risk-free rate 4.5% Long-term governmental bond as of the measurement date.
Equity risk premium 7.5% Long horizon equity risk premium.
Beta 1.10 Beta is based on guideline public companies.
12.8% Risk free rate + [beta x equity risk premium].
Unsystematic risk factors:
Size premium 2.0% Applicable size premium.
Company-specific risk 1.0% Risk premium is based on qualitative factors that reflect specific risks not factored in the beta or size premium.
Cost of equity 15.8% Risk-free rate + [beta x equity risk premium] + size premium + company-specific risk.
Estimated pretax cost of debt 8.0% Applicable borrowing rate for market participant/subject company as of the measurement date.
Tax rate 30.0% Corporate income tax rate.
After-tax cost of debt 5.6% After-tax cost of debt = 8% * (1 – 30%).
Equity-to-capital 70.0% Industry/market capital structure.
Debt-to-capital 30.0% Industry/market capital structure.
Estimated WACC (rounded) 13.0% WACC = [equity-to-capital * cost of equity] + [debt-to-capital x after-tax cost of debt].
Case 6: Gator Electronics
Handout 1
Page 4
Copyright 2011 Deloitte Development LLC
All Rights Reserved.
Exhibit 4
Valuation Schedules: Gator Electronics Inc.
September 30, 20X3, Reporting Unit Balance Sheet (U.S. Reporting Unit)
$US in thousands
Balances Common Size
ASSETS
Cash and short-term investments $ 140,000 11.7%
Net accounts receivable 150,000 12.5%
Inventories 100,000 8.3%
Other current assets 40,000 3.3%
Total current assets 430,000 35.8%
Net PP&E 400,000 33.3%
Intangible assets 70,000 5.8%
Goodwill 280,000 23.3%
Other assets 20,000 1.7%
Total long-term assets 770,000 64.2%
Total assets $ 1,200,000 100.0%
LIABILITIES & SHAREHOLDERS’ EQUITY
Accounts payable $ 140,000 11.7%
Income taxes payable 80,000 6.7%
Other current liabilities 100,000 8.3%
Total current liabilities 320,000 26.7%
Long-term debt 150,000 12.5%
Other long-term liabilities – 0.0%
Total long-term liabilities 150,000 12.5%
Total liabilities 470,000 39.2%
Preferred stock – 0.0%
Common equity 730,000 60.8%
Total shareholders’ equity 730,000 60.8%
Total liabilities and shareholders’ equity $ 1,200,000 100.0%