Reeby Sports

REEBY SPORTS

George Reeby proposes to sell 90,000 shares, or about 22%, of his company. How much are those shares worth? We have to value the company using George's forecasts.

The forecasts presented in Tables 1 and 2 do not show free cash flow and financing requirements. These are calculated in Table A1. Note that free cash flow for 2015 is -$2.3 million. But dividends are $2.0, so the company will need 2.3 + 2.0 = $4.3 million in outside equity financing.

Table A2 shows that the book value of equity is forecasted to grow from $40.71 million in 2014 to $63.31 million at the end of 2020. Table A3 works out earnings, dividends and free cash flow for 2021. By that time Reeby Sports should be earning 12% on equity, paying out 40% of earnings, and growing steadily at 7.2% per year. Note that gross investment equals depreciation plus 60% of earnings.

It's easiest to value the company by assuming that its current shareholders contribute all of the $4.3 million required in 2012 and receive all of the free cash flow afterwards. Note from Table A1 that the present value of free cash flow from 2014 to 2020 is $8 million.

Of course there are several ways to calculate PVH, the horizon value in 2020. The constant-growth DCF formula gives

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implying a company value in 2013 of:

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Next suppose that Reeby Sports will lose its competitive edge by 2020 and will have no PVGO looking forward from that date. In that case we just capitalize 2021 earnings at 10%:

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George also has a "comparable," Molly Sports. The case gives three ratios for Molly:

|Ratio |2020 Valuation |PV in 2013 |

| | | |

|Market-to-book = 1.5 |1.5 x 63.31 = 94.97...