Threshold Sports Llc
.... Further, the data in Exhibit 2 provide a basis for operating cost estimation for the years 2001-2005. Included in the operating costs are the costs for the same events in addition to the cost from the leases. The difference between the projected income and operating costs gives the profits/losses from the racing events. These profits/losses, added to the management fee income, special projects income, and other miscellaneous income give the total income from the events. Using the method above, the total income from the events reached $1,322 (2001), $1,945 (2002), $2,595 (2003), $3,531 (2004), and $4,368 (2005). Expenses. To estimate the expenses associated with the events, used were data from Exhibit 3. To reach the expenses’ amounts, from the total expenses in the Exhibit 3 subtracted were the capital expenditures. That led to cost estimates as follows: $1,214 (2001), $1,452 (2002), $1,737 (2003), $2,119 (2004), and $2,521 (2005). The difference between the two gives the operating income for the events. Thus, the operating income is $108 (2001), $493 (2002), $858 (2003), $1412 (2004), and $1847 (2005), which equals EBIT, given no other income is expected. Since, no interest is accrued (no debt) these amounts equal pre-tax income from the cycling events. Further, assuming 40% tax rate, the taxes to be paid amount to $43.2 (2001), $197.2 (2002), $343.2 (2003), $564.8 (2004), and $738.8 (2005). The difference between EBIT and taxes leads to EBITDA of $64.8 (2001), $295.8 (2002), $514.8 (2003), $847.2 (2004), and $1,108.2 (2005). Adding back depreciation expenses and subtracting the capital expenditures leads to free cash flow estimates of: $25.8 (2001), $261.8 (2002), $476.8 (2003), $815.2 (2004), and $1082.2 (2005). Terminal Value. The terminal value at the end of the fifth year is determined by using the formula: Terminal value = (FCF5th year)*(1+Growth rate) / (kwacc – Growth rate) = (1082.2(1.15) / (0.3 – 0.15) = $8,296.87 For kwacc I assumed the 30% ROE. Growth rate is assumed to be 15% based on the average discounted cash flow changes ranging from 10% to 20%. Present Value of the Equity. Given the data thus far, the present value of the equity amounts to $3,023.26. Value of shares is calculated as dividing the PV of the Equity by the units of shares (in this case 30). The value per unit of share equaled $106.78. Assuming comparability among the companies presented in Exhibits 13 and 14 and Threshold, Mr. Frischkorn can estimate the Value of the firm as follows: Value of the Firm = EBIT5year * Multiples factor =$1,082 *6= $11,820. Following Table 1 summarizes the results from the above-described operations. Table 1. Value per share estimation under Common Stock option (in thousands) Debt Option To assess this alternative Mr. Frischkorn should follow similar to common shares estimate option approach. Revenues and expenses are estimated using the same technique and data (Exhibits 2 and 3). Operating income, the difference between revenues and expenses, is $108 (2001), $493 (2002), $858 (2003), $1412 (2004), and $1847 (2005), which equals EBIT, given no other income is expected. The debt will be paid out in the year 2003, as indicated by Exhibit 5. That means that interest payments will be from 2001 through 2003. Interest payment is calculated as the amount of financing $500,000 is multiplied by the rate, which according to Exhibit 5 equals 9.1%+4%=13.1% annual interest rate. Pretax income is the difference between the EBIT and the interest payment. Taxes are estimated as the pretax income is multiplied by the tax rate of 40%. The difference between the pretax income and tax payments represents the net income. EBITDA is calculated as the difference between the EBIT and the tax payments. Adding to that the depreciation and subtracting capital expenditures and the debt repayment in the third year represents the free cash flow under the dept financing option. The value of the unit of share is calculated as the present value of equity is divided by the units outstanding (30). Following Table 2 presents the estimated of the free cash...