Valuing Quantile Capital: A Five-Year DCF
A private equity client is considering acquiring Quantile Capital, a asset management business in UK. You have been asked to build the valuation case.
The company generated £404 M of revenue last year at an EBIT margin of 15%. Management projects revenue growth of 11% 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 3%. Changes in net working capital consume roughly 5% of incremental revenue. The effective tax rate is 29%.
The company's equity beta is 0.91, the risk-free rate is 6.2%, and the equity risk premium is 5.5%. Debt carries a pre-tax cost of 10.5% and makes up 22% of the capital structure.
The seller is asking £3833 M for the enterprise.
operating
- revenue m
- 404
- tax rate pct
- 29
- ebit margin pct
- 15
- da pct of revenue
- 3
- revenue growth pct
- 11
- capex pct of revenue
- 4
- nwc pct of incremental revenue
- 5
transaction
- asking enterprise value m
- 3833
capital structure
- equity beta
- 0.91
- debt weight pct
- 22
- risk free rate pct
- 6.2
- equity risk premium pct
- 5.5
- pre tax cost of debt pct
- 10.5
Value the business and advise on the asking price. Provide:
- Analysis — a five-year free cash flow projection, your WACC, and a terminal value.
- Risks — the assumptions your valuation is most sensitive to.
- Recommendation — is £3833 M attractive? What would you pay?
Show your calculations. State assumptions explicitly where the case is silent.
100 points, 60% to pass.
- discount rate20
- recommendation20
- terminal value20
- cash flow projection25
- sensitivity analysis15
Reveal suggested structure
-
Free cash flow for each of years 1-5: FCF = EBIT × (1 − t) + D&A − capex − ΔNWC
-
WACC:
- Cost of equity = 6.2% + 0.91 × 5.5% = 11.21%
- After-tax cost of debt = 10.5% × (1 − 29%) = 7.46%
- WACC = 78% × cost of equity + 22% × after-tax cost of debt
-
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.
-
Discount everything to today, sum, and compare with the asking price.
-
Sensitivity across WACC and terminal growth.