FINA 410 Study Guide - Final Guide: Optio, Valuation Of Options, Treasury Stock
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Getaflix is a relatively new DVD delivery service. Despite being young they have amassed a considerably large customer base. Because they have emerged as a major player in the entertainment industry and a good investment opportunity, you have been tasked by your firm to determine Getaflixâs share price at the end of 2017. To accomplish this task you employ multiple methods. One method applies a customer value model. This model uses some data readily available from Getaflixâs Annual Report
The data are provided in Table 1.
Table 1 gives information about Getaflixâs two main types of current subscribers. It also provides information on the firmâs discount rate, margin, monthly revenue, cash on hand, shares outstanding and other variables that you could employ in your analysis. Using information that is readily available in Table 1 determine (for each segment) the âAverage Lifeâ in months. Then, once you have completed Table 1, populate the blank cells in Table 2A by calculating the CLV, customer equity, firm and share value.
(Hint: 1. Firm Value = Customer Equity + Cash on Hand; 2. Project the customer value for each segment over the time period specified by the variable âAverage Lifeâ to get the net present customer value; 3. The labels in Tables 2A are hints in themselves)
| Table 1: Data and Assumptions about Getaflix in 2017 | |
| Annual Discount Rate | 8.30% |
| Total Number of Subscribers | 10,200,000 |
| Cash on Hand | $397,000,000 |
| Shares Outstanding (approx.) | 45,000,000 |
| Short-term (ST) Subscribers | |
| Percentage of ST subscribers | 35% |
| Monthly Churn of ST subscribers | 5% |
| Average Monthly Rev ST subscribers | $13 |
| Average Life (months) | ?????? |
| Operating Margin | 20.50% |
| Long-term (LT) Subscribers | |
| Percentage of LT subscribers | 65% |
| Monthly Churn of LT subscribers | 1.75% |
| Average Monthly Rev LT subscribers | $14.25 |
| Average Life (months) | ?????? |
| Operating Margin | 23.50% |
Table 2A: Heterogeneity Based Approach: In this approach you use information on each segment (ST and LT) in Table 1 to determine the CLV for a customer from each segment. Using this information, the segment proportions and other variables in Table 1 determine the Customer Equity, and the firm and share value. (6 Points)
| TOTAL Short Term Customer CLV | |
| TOTAL Long Term Customer CLV | |
| Average CLV (LT and ST) | |
| Net Customer Equity Contribution to Firm Value | |
| Firm Value for Getaflix from Heterogeneity Based Approach | |
| Share Price |
Table 2B: Aggregate Approach: What if you did not incorporate heterogeneity explicitly into your CLV calculations? Using the information from Table 1, assuming you had no idea about heterogeneity, determine the values you would expect in the rows in Table 2B for an âaverage customerâ. Additionally, also calculate the CLV, firm value and share value for Getaflix in this case.
| Average Monthly Revenue | |
| Operating Margin | |
| Monthly Churn | |
| Life (months) | |
| CLV | |
| Net Customer Equity Contribution to Firm Value | |
| Firm Value for Getaflix from Aggregate Approach | |
| Share Price |
(ALL WORK MUST BE DONE ON EXCEL)
Build a financial model on the following template. Assume that the WACC is 20%. Also assume the debt and equity remain the same. The FCF long-term growth rate is the same as the sales growth rate. ( Copy the table into Excel.)
| Sales growth | 10% | |||||
| Current assets/sales | 15% | |||||
| Current liabilities/Sales | 8% | |||||
| Net fixed assets/sales | 77% | |||||
| cost of goods sold/sales | 50% | |||||
| depreciation rate | 10% | |||||
| interest rate on debt | 10% | |||||
| interest paid on cash and marketable securities | 8% | |||||
| tax rate | 40% | |||||
| dividend payout ratio | 40% | |||||
| Year | 0 | 1 | 2 | 3 | 4 | 5 |
| income statement | ||||||
| sales | 1000 | |||||
| cost of goods sold | 500 | |||||
| interest payment on debt | 32 | |||||
| interest earned on cash and marketable securities | 6 | |||||
| depreciation | 100 | |||||
| profits before tax | 374 | |||||
| taxes | 150 | |||||
| profits after tax | 225 | |||||
| dividends | 90 | |||||
| retained earnings | 135 | |||||
| Balance sheet | ||||||
| cash and marketable securities | 80 | |||||
| current assets | 150 | |||||
| fixed assets | ||||||
| At cost | 1070 | |||||
| depreciation | 300 | |||||
| Net fixed assets | 770 | |||||
| total assets | 1000 | |||||
| current liabilities | 80 | |||||
| debt | 320 | |||||
| stock | 450 | |||||
| accumulated retained earnings | 150 | |||||
| total liabilities + Equity | 1000 |
a. Value the companyâs equity. (SHOW YOUR WORK ON EXCEL)
b. The model in Part A includes cost of goods sold but not selling, general, and administrative (SG & A) expenses. Suppose that the firm has $200 of these expenses each year, irrespective of the level of sales. Change the model to accommodate this new assumption. Show the resulting income statements, balance sheets, the free cash flows (FCF), and the valuation. (SHOW YOUR WORK ON EXCEL)
c. Build a data table in which you show the sensitivity of the equity value to the level of SG & A. Let SG & A vary from $0 per year to $600 per year. (SHOW YOUR WORK ON EXCEL)
d. Back to Part A. Suppose that the fixed assets at cost follow the following step function:
Incorporate this function into the model and solve for the market value of equity. (SHOW YOUR WORK ON EXCEL)
e. Back to Part A again. Make two changes in the model: 1). Let debt be the plug and keep cash constant at its year-0 level. 2). Suppose that the firm has 1,000 shares and that it decides to pay, in year 1, a dividend per share of $0.15. In addition, suppose that it wants this dividend per share to growth in subsequent years by 12% per year. Incorporate these changes into the pro forma model and solve this model to get the market value of equity per share. (SHOW YOUR WORK ON EXCEL)
