Profitability Analysis: 5 year projection for cash flow / risk rate (i chose corporate documents as the style - but there really isn't a specific request on the professor's part - I just chose the one that i thought best suits).
Assume you are a financial analyst for a Fortune 100 company. Your company is considering acquiring The Cheesecake Factory Incorporated (“CAKE
”) as a means to diversify its current operations and to increase profit and ROE of the combined companies. You are to determine a purchase price for the acquisition of CAKE
Assume for your analysis that CAKE
is a private company. Consequently, you cannot use market capitalization as a valuation technique.
Please follow the following guidance.
1. An executive summary of conclusions (one paragraph)
2. A description of the company, its products and its markets (limit two pages)
3. A general overview of the expected economy and industry prospects over the next five years (limit one page).
4. Highlights of the company’s financial statements (past 3 years for income and cash flow statements and two years for balance sheets). For example, assets, liabilities, debt equity, revenues, costs, margins, net income from continuing operations, operating cash flows, investing activities, financing activities and other financial statement information that you consider important. Make comments concerning these reviews ??" trends, is the company improving (why), is the company deteriorating (why) and any unusual items noted, etc.
5. Prepare a valuation analysis of the company. Trends in key financial components and appropriate ratios compared to various years and industry sector averages. If trends in company’s ratios have changed, explain why. If company’s ratios are different from industry ratios, explain why
6. Can the company remain competitive, increase or maintain market share, replace assets, find new markets over the next five years?
7. Can the company withstand external factors outside the company’s control (economic recessions, natural disasters, union strikes, etc)/
8. You are allowed to make reasonable assumptions about facts and circumstances to fit your case.
9. Use the annual financial statements for the latest year available as the basis for your analysis. If quarterly statements have been issued since the latest annual statements, you are not required to update for the quarterly information.
Prepare a five- year net income statement projection. Do not project interest expense. All interest bearing debt will be repaid as part of the acquisition.
Net income projections:
a. Project revenues based on a combination of history, changes in the company, economy or other factors that you may determine
b. Similar for expenses, except interest expenses (which may increase or decrease depending on loan balance of new credit facility)
c. Do not project one-time or nonrecurring items, unless there is a reason (explain).
d. Short summary explaining projection assumptions for revenue and expenses
e. Do not use a complicated format for your projections. Assume the same tax rate is used in the most recent income statement
Cash flow projections:
a. Start with net income from the net income projections
b. Use the following format:
i. Net income
ii. + - noncash charges (probably only depreciation and amortization)
iii. Ignore the net changes in current assets and current liabilities
iv. Sum of I and ii will result in net cash flow from operations
Prepare a five-year cash flow projection (above). Part of the purchase price will repay all debt. As a result, there will be no cash flow from financing activities in the five-year cash flow projection. In year five, calculate a residual value for the value of all subsequent years’ cash flows. The residual value will be calculated by dividing the fifth year cash flow by the required rate of return. Add the residual value to cash flow for year five.
Explain reasons for your required rate of return for this acquisition.
Determine the purchase price for CAKE
by calculating the present value (at the required rate of return) for years 1-5 (including residual value in year 5).
Requirement is for a written report
There are faxes for this order.
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