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Assignment 3 Final Project Valuation using P/E, Price/Sales,

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Assignment 3: Final Project: Valuation using P/E, Price/Sales, and Price/Cash Flow Ratio

The final project involves a hypothetical case for analysis. Value a privately held company that plans to go public with an Initial Public Offering (IPO). The valuation will provide necessary information to price the IPO.

Helen Troy started a Teabucks teashop in Troy, Michigan a few years ago. She formed a corporation, and owned all the shares of this corporation. She played various roles as the CEO and a cashier. Fortunately for Helen her teashop became very popular and her firm grew at a very rapid pace. She expanded her business to all the big cities. She added more staff and even hired a MBA graduate from the University of Michigan. The firm has negligible debt, and all the growth has been financed with equity. The stock was owned by only a few individuals and hence a privately held corporation. Therefore no market price has been established for the stock. Now she wants to expand into tea packaging and tea bottling operations, which require large investment outlays. So Helen decided to take her company public. Valuation of a privately held firm requires:

An understanding of the PE ratio and its use in valuation

An understanding of discounted cash flow methods and their application in valuation

Using the growth rate to estimate future cash flows

Using CAPM to calculate the discount rate using value from a proxy firm

Knowledge of financial markets and the registration procedure for issuing securities to the public

Knowledge of the Internet and how new securities can be issued through the Internet
Valuation using P/E, Price/Sales, and Price/Cash Flow Ratio:

Teabucks Income statement (in $Million and rounded to nearest million)

Total Revenue 750
Costs of goods sold 575
Gross profit 175
Selling and Administrative expenses 40
Depreciation / Amortization 45
Other expenses 25
Income before taxes (EBIT) 65
Taxes (38%) 25
Net Income 40

Industry Average Starbucks
P/E Ratio 35 52
Price / Sales Ratio 2.0 3.75
Price / cash Flow 20 28

This week you'll perform the valuation using the P/E, Price/Sales, and Price/Cash Flow Ratios.

How do I do this since we have no idea how any shares they are offering or the market price. I am so confused and do not know where to start.
Submitted: 6 years ago.
Category: Homework
Expert:  SteveS replied 6 years ago.

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Expert:  SteveS replied 6 years ago.
Pam, do you have any questions? If not, please remember to click the Accept button. Thanks.