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A business Valuation Proposal on Red-beach Corporation

BUSINESS VALUATION PROPOSAL 7

Abusiness Valuation Proposal on Red-beach Corporation

BenQ

REDBEACH CORPORATION VALUATION

PROPOSAL ON INVESTMENT DECISION

Glenda

4/16/2014

This document is a business valuation report on Red Beach Corporation. The current management of this company is inviting investors. The actual sales in the previous year of this company were $83.6 million. This document cordially gives a detail progress of valuation of the business. Current value of the company is $17 million at a fair market price.

BusinessValuation Proposal

RedbeachCorporation is a company that was started in 2005 in Rio De Janeiro.It is privately owned by Juan Pablo De Lorentis who is globalbusiness man. Mainly, Redbeach promotes relaxed lifestyles and itspurpose is to provide luxury within its premises. Its market niche isthe high income population owing that work under challenging anddemanding environments (Levin, 1998 Pg. 52).

TheRedbeach is located on the Rio de Janeiro and does not pay rent. Itsworkforce is extensive with 100 employees. Since it is owned by anindividual, the corporation is not currently listed, for this reasona detail evaluation report has been prepared for your consideration.The balance sheets from the previous business year depict a sale of$83.6 million. With increased marketing, the sales could beintensified (Levin, 1998 Pg. 66).

Usingthe constant growth model, the value of the company stands at $17.3million before considering the outstanding a debt which has a marketvalue of $36 million. Previously, its free cash flow (FCF) was 2.5.This was calculated as depreciation + after tax profit –investment.Generally, FCF refers to the amount of returns made to investors bythe firm after changes that are prerequisite for growth are made inthe firm. (Levin, 1998 Pg. 68).

Theterm free cash flow is closely related to income but are not similar.Income is generally the returns made by the company to theshareholders and is calculated after annual interest earned. On theother hand, FCF is calculated before the interest. Furthermore,income is not reduced by capital expenditures as it is with the FCF.The latter is calculated after deducting capital expenditures andinvestments in working capital. For this reason, the FCF may benegative occasionally which is acceptable since it is temporary(Levin, 1998 Pg. 67).

TheRedbeach Company is in a competitive market. Its sales havepreviously been growing between 5% and 8%. However, with the previousyear’s balance sheets, various assumptions were made. First, thesales growth is assumed to increase to 7.0% at which is becomesconstant for three years. In the fourth year, there is a sharpdecrease in growth to 4% all the way up to the 6th year where itdrops further in the third year to 3%. This decrease in sales growthis inverse to the cost of sales which is growing to 75.0% as soon asthe sales growth decrease. It is assumed that decrease in salesgrowth is likely to be arising from increasing competition from otheroptions available in the market. Consequently, it is assumed thatmarketing costs will increase (Levin, 1998 Pg. 51).

Thevalue of the company at year zero is $0.609 million. To find thevalue of the company, we apply this formula PV (Company) = PV (cashflows from year 1-6) + PV (horizon value) which gives us $12.221million. As stated earlier, the company has $36 million accrued debtthat was unpaid. Therefore, the value of equity of the companyamounts roughly to $-24 million (Levin, 1998 Pg. 80).

&nbsp

Last Yr

1

2

3

4

5

6

7

0

1. Sales

83.6

89.5

95.7

102.4

98.3

94.4

90.6

87.8

Sales Growth %

6.7

7

7

7

4

4

4

3

2. Cost of goods sold

63.1

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

Costs (% of Sales)

75.5

74

74.5

74.5

75

75

75.5

76

3. EBITDA

20.5

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

(1-2)

4. Depreciation

3.3

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

5. Profit before Tax (EBIT) (3-4)

17.2

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

6. Tax( 35% 0f 6)

6

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

7. Profit after tax (5-6)

11.2

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

8. Investment in fixed assets

11

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

9. Investment in working capital

1

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

10. FCF (7+4-8-9)

2.5

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

PV FCF,

&nbsp

&nbsp2.29

&nbsp2.1

&nbsp1.93

&nbsp1.77

&nbsp1.62

&nbsp1.49

&nbsp6.127

Yrs 1-6

PV Horizon Value

&nbsp

&nbsp

&nbsp

&nbsp

(Horizon

Value

&nbsp

&nbsp1.021

in Yr6)

PV Company

&nbsp0.609

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

&nbsp

Onthe other hand, in order to increase sales, more investments in fixedasset and WC (working capital) should be prioritized. Red Beach’shas net fixed asset of 79% currently for each dollar sales.Therefore, it is highly recommended that investments in fixed assetsare prioritized so as to boost the sales. This is the decision madeon forecasted performance made by Red Beach corporation which islikely or unlikely to be slightly adjustable. This may be boostedthrough and IPO since the company owns 1.5 million shares outstanding(Levin, 1998 pg75).

Theagreeable price share is $16.00 per share. It is guided by thestanding debt owed by the company. During the sensitive analysis, anincrease in percentage sales would mean that the company the WVCC(weighted average cost of capital) would consequently increase alongwith depreciation of fixed assets. In order to have more output,higher costs will be incurred. For example, Redbeach Corporation hascome up with unique weight-loss program called the Beach Diet. Whichcomprises of red wine, barbecue and sunshine(Levin,1998 Pg. 72).

Itis highly possible that this marketing strategy will result in highersales. With the change of lifestyles and way of lives from that ofvegetables to that of barbeques, the publicity of Red Robin will beheightened and consequently the sales will shoot. It is an irony thatRed Beach has discovered a way of combining strenuous weight lossprogramme which combines weight boosting diet and fun at the beach.Currently, there is increased spending in luxury in the world. Thisis definitely a good marketing strategy.

Onthe contrary, if the sales decrease by 1 percent, this would beprojected to the shareholders’ dividends. Therefore, the companywill need to establish means on paying dividends within the laid downpolicies. In addition, low sales will result in higher competitionsince this market is quite competitive (Levin, 1998 Pg.98).

Redbeachcorporate is a viable business. It offers what currently is trendingin the most sought after services and products. This is because itsmain attention is vested in promoting relaxed lifestyle away from thedaily hustle and bustles of life. With appropriate economic advice,the company is destined to be a global destination. It is definitelyan appropriate venture to invest in especially due to current demandsfor frill.

Inconclusion, I would highly advice that you buy this company as awhole. With its 1.5 million shares, more capital can be generatedfrom the public. This will help in stabilizing the liquidity of thecompany by increasing the value of fixed assets in the company.Shares should be sold at $16.00 a share so as to quickly offset theexisting debt. With the $90 million available, more investments canbe made in fixed and working capital. More funds can also bechanneled to adequate and extensive marketing which will boost thesales in turn.

References:

Levin.J (1998) Stockholm SchoolofEconomics:Essaysin Company Valuation50-100