FNCE 4101 Week 11 Company Valuation Final Paper Example

Valuing Halvorsen Industrial Supply at $24 to $31 a Share: A Five-Year Discounted Cash Flow Model With Terminal Value Calculated Two Ways, a Four-Peer Comparable Check and an Assumption Register

Student Name

Walden University

FNCE 4101: Corporate Finance

Instructor Name

Month Day, Year

Valuing Halvorsen Industrial Supply at $24 to $31 a Share: A Five-Year Discounted Cash Flow Model With Terminal Value Calculated Two Ways, a Four-Peer Comparable Check and an Assumption Register

The Range

Halvorsen Industrial Supply is worth between $24 and $31 a share, with a central estimate of about $27, against a market price of $30.00. Halvorsen, a composite supplier of factory maintenance parts in the Midwest, has been the course's case company since Week 2. The range comes from a discounted cash flow model, checked against four comparable companies. The market price sits near the top of the range, which means buyers at $30.00 are paying for assumptions at the optimistic end of what the evidence supports. Dollar amounts are in millions unless shown per share.

The Discounted Cash Flow Model

The model starts from fiscal 2025 free cash flow to the firm of $109.6 million, built in Week 2 from operating income of $185.0 million less 24 percent tax, plus depreciation of $42.0 million, less capital spending of $55.0 million and an $18.0 million working capital increase. It projects five years of 4 percent growth, Halvorsen's five-year average sales growth, and discounts at the 8.5 percent rate derived in Week 5. Those five years are worth $483.5 million today.

Terminal Value Two Ways

The two methods agree closely. The base perpetuity growth rate of 3.0 percent implies an exit multiple of about 9.0 times year 5 EBITDA, and a 9.0 times exit implies growth of about 3.0 percent. That agreement is a useful check: a growth rate that implied a multiple far from those paid for similar companies, or a multiple that implied an implausible growth rate, would signal an error (Koller et al., 2020).

In every case, terminal value is between 75 and 79 percent of enterprise value. Three-quarters of the answer rests on what happens after year 5, which is why the Week 7 sensitivity analysis found terminal growth and the discount rate to be the inputs that matter most.

Table 1

Terminal Value by Two Methods and the Resulting Value per Share

Value per share subtracts net debt of $510 million and divides by 60 million shares. Year 5 EBITDA is $276.2 million. Composite company.

Comparable Companies

At the median enterprise value multiple of 9.35 times fiscal 2025 EBITDA of $227 million, Halvorsen's equity is worth about $26.87 a share. At the median price-to-earnings multiple of 16.15 times earnings per share of $1.96, it is worth about $31.71. The two multiples bracket the discounted cash flow central estimate. The price-to-earnings figure runs higher because Halvorsen carries less debt than most peers, so its earnings are not reduced as much by interest. Damodaran (2012) recommends enterprise multiples for comparing firms with different capital structures, which favors the lower figure.

Table 2

Four Comparable Listed Industrial Distributors

Composite peers selected for product overlap, customer base and size; multiples illustrative.

Assumption Register

Table 3

Assumption Register

Composite company; effects computed from the model holding other inputs at base values.

Why the Range Is Not Narrower

A single figure would be easier to report, but it would hide how much the answer depends on judgment. The low end of $24 combines 2.5 percent terminal growth or an 8 times exit multiple, both reasonable for a mature distributor in a cyclical industry. The high end of $31 reflects a 3.5 percent growth rate or a 10 times multiple, both defensible if Halvorsen keeps gaining share from smaller rivals. Narrowing the range would require evidence the model does not have, such as a firm plan for growth beyond the Midwest. Reporting the range, with its drivers, lets a reader decide which end they believe.

Conclusion

Halvorsen is fairly valued to slightly overvalued at $30.00. The price requires terminal growth near 3.5 percent or an exit multiple near 10 times, both at the top of the plausible range, or a lower discount rate than the evidence supports. An investor who expects Halvorsen to remain a mature regional distributor should treat about $27 as fair value and $30 as a full price. Three developments would raise the estimate: a successful integration of the Pinecrest acquisition from Week 10, which could add about $0.35 a share of value net of the premium paid; sustained growth above 4 percent; or a lower cost of capital if the company moved toward its target capital structure from Week 8. Brealey et al. (2020) note that a valuation is most useful when it shows which beliefs the price depends on, and here the belief is long-run growth.

References

Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of corporate finance (13th ed.). McGraw Hill.

Damodaran, A. (2012). Investment valuation: Tools and techniques for determining the value of any asset (3rd ed.). Wiley.

Koller, T., Goedhart, M., & Wessels, D. (2020). Valuation: Measuring and managing the value of companies (7th ed.). Wiley.