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Valuing Ferro Industries: A Five-Year DCF

Finance
medium60 min0 submissions
Morgan Stanley
Scenario

A private equity client is considering acquiring Ferro Industries, a industrial components business in Europe. You have been asked to build the valuation case.

The company generated €283 M of revenue last year at an EBIT margin of 14%. Management projects revenue growth of 9% per year for five years, after which the business is expected to settle into mature, GDP-like growth.

Capital expenditure runs at 4% of revenue and depreciation & amortisation at 4%. Changes in net working capital consume roughly 4% of incremental revenue. The effective tax rate is 27%.

The company's equity beta is 1.25, the risk-free rate is 3.6%, and the equity risk premium is 4.5%. Debt carries a pre-tax cost of 9.3% and makes up 42% of the capital structure.

The seller is asking €3322 M for the enterprise.

Supporting data

operating

revenue m
283
tax rate pct
27
ebit margin pct
14
da pct of revenue
4
revenue growth pct
9
capex pct of revenue
4
nwc pct of incremental revenue
4

transaction

asking enterprise value m
3322

capital structure

equity beta
1.25
debt weight pct
42
risk free rate pct
3.6
equity risk premium pct
4.5
pre tax cost of debt pct
9.3
Your task

Value the business and advise on the asking price. Provide:

  1. Analysis — a five-year free cash flow projection, your WACC, and a terminal value.
  2. Risks — the assumptions your valuation is most sensitive to.
  3. Recommendation — is €3322 M attractive? What would you pay?

Show your calculations. State assumptions explicitly where the case is silent.

Ready to move forward? Up next: Halcyon Bank: Can We Raise Prices 16%?Next question
How you'll be graded

100 points, 60% to pass.

  • discount rate20
  • recommendation20
  • terminal value20
  • cash flow projection25
  • sensitivity analysis15
Hint
Reveal suggested structure

  1. Free cash flow for each of years 1-5: FCF = EBIT × (1 − t) + D&A − capex − ΔNWC

  2. WACC:

    • Cost of equity = 3.6% + 1.25 × 4.5% = 9.22%
    • After-tax cost of debt = 9.3% × (1 − 27%) = 6.79%
    • WACC = 58% × cost of equity + 42% × after-tax cost of debt

  3. Terminal value at year 5, using either perpetuity growth (g below long-run GDP) or an exit EBITDA multiple. Sanity-check one against the other.

  4. Discount everything to today, sum, and compare with the asking price.

  5. Sensitivity across WACC and terminal growth.