A

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====== ============== =========== ====== ============= ==========

INPUT DATA:
Premerger Data:
Target's beta
Target's debt ratio
Target's tax rate
Shares Outstanding
Current price per share
Target's market value

1.6
10.0%
30.0%
3,000,000
$1.50
4,500,000

KEY OUTPUT:
Max offer price
Max offer price/sh

$12,350,778
$4.12

Discount rate
Expected Term. Value

15.41%
$16,666,362

Sales data:
1996 Sales
Sales growth
Long-run growth rate

$12,000,000
20.00%
5.0%

Postmerger Data:
Debt ratio after merger
Tax rate after merger
Initial Assets
Initial asset growth
Market Data:
Risk-free rate
Market risk premium
CC's debt cost

25.0%
40.0%
$3,000,000
15.00%

6.5%
5.0%
10.0%

Cost Data:
VC/Sales
FC/Assets
Depreciation/Assets

80.00%
20.00%
8.00%

Additional inputs related to the terminal value are given in the

rows 12 to 18 of the Computech Model worksheet, where they are used.
====== ============== =========== ====== ============= ==========

TABLE 1
Data on CCI
1995 Assets (end of year)
1995 sales
1995 net icome
Estimated beta coefficient
Debt ratio
Tax rate
Shares outstanding
Latest price per share
Pro forma data assuming CCI is operated by Computech starting in 1996:
1996 Assets (end of year)
1996 sales
1996 net income
Debt ratio
Tax rate
Sales growth 1996-1999
Assets growth, 1996-1999
Long-run growth rate in sales and assets
Other data and assumptions, post-merger:
Risk-free rate
Market risk premium
Company's cost of debt
Variable costs/sales
Fixed costs/assets
Depreciation/assets
Valuation multiples (averages for young, rapidly growing software firms):
Value as a multiple of cash flow
Value as a multiple of sales
Value as a multiple of net income
Value as a multiple of market/book
Question 3

Table 2
Balance Sheet Information (end of year)
Assets
Debt

$
$

1996
3,450,000 $
862,500 $

1997
3,967,500
991,875

Income and Cash Flow Statements

Net Sales
Var.operating costs
Depreciation
Fixed operating costs
Interest expense
Earnings before taxes
Taxes
Net income
Plus Depreciation
Cash flow
Req'd addn to equity
Available CF
Expected terminal value
Free Cash Flow

$
$
$
$
$
$
$
$
$
$
$
$

Maximum total offer, total:

Maximum offer price per share

$
$

1996
12,000,000
9,600,000
276,000
690,000
86,250
1,347,750
539,100
808,650
276,000
1,084,650
388,125
696,525

$
$
$
$
$
$
$
$
$
$
$
$

696,525 $

1997
14,400,000
11,520,000
317,400
793,500
99,188
1,669,913
667,965
1,001,948
317,400
1,319,348
446,344
873,004
873,004

12,915,306
4.31

Ratios:
1996
6.74%
23.44%
31.25%
3.48
25%

Return on Sales
Return on assets
Return on equity
Total Assets Turnover
Debt/Assets

Question 4
r (sL)

r(RF) + r (market premium) * beta

Question 5
HVUL =
V=

Question 7

$ 17,667,625.37
$ 12,915,306.11

1997
6.96%
25.25%
33.67%
3.63
25%

Current price

appraised value
appraised stock price

$ 18,711,198.49
$
3.74

Value
Value
Value
Value

as
as
as
as

a
a
a
a

multiple
multiple
multiple
multiple

Available CF

of
of
of
of

1.50

Market value

1
9
0.6
11
4.5

cash flow
sales
net income
market/book

1996
800,000.00 $

1997
1,050,000.00

800,000.00 $

1,050,000.00

$
3,000,000.00
$ 10,000,000.00
$
425,000.00
1.6
10.00%
30.00%
3000000
$
1.50

Unlevered Nero's beta=

Revelered Nero's beta=

$
3,450,000.00
$ 12,000,000.00
$
808,650.00
25%
40%
20%
15%
5%

6.5%
5.0%
10.0%
80.0%
20.0%
8.0%

10
0.5
12
3.5

$
$

1998
4,562,625 $
1,140,656 $

1999
5,247,019
1,311,755

$
$
$
$
$
$
$
$
$
$
$
$
$

1998
17,280,000
13,824,000
365,010
912,525
114,066
2,064,399
825,760
1,238,640
365,010
1,603,650
513,295
1,090,355

1999
20,736,000
16,588,800
419,762
1,049,404
131,175
2,546,859
1,018,744
1,528,116
419,762
1,947,877
196,763
1,751,114
17,667,625.37
19,418,739

1998
7.17%
27.15%
36.20%
3.79
25%

1999
7.37%
29.12%
38.83%
3.95
25%

$
$
$
$
$
$
$
$
$
$
$
$
$
1,090,355 $

15.41%

1996
696,525.00 $

1997
873,003.75

696,525.00 $

873,003.75

HVUL

7,500,000.00

Multiple
$ 17,667,625.37
$ 15,760,026.62
$ 12,441,600.00
$ 16,809,271.26
$
5,902,896.09

$
$

weight = judgmental
x
x
x
x

1998
1999
1,372,500.00 $ 2,435,625.00
$ 14,320,477.17
1,372,500.00 $ 16,756,102.17

0.5
0.2
0.2
0.1

=
=
=
=

for multiple
NPV = maximum total offer=
maximum price per share=

1.48
1.78

$
$

1998
1999
1,090,354.63 $ 1,751,114.07
$ 17,667,625.37
1,090,354.63 $ 19,418,739.44

$
$
$
$
$

7,880,013.31
2,488,320.00
3,361,854.25
590,289.61
14,320,477.17

ximum total offer=

price per share=

$ 11,820,409.31
$
2.36

TABLE 1
Data on CCI
1995 Assets (end of year)
1995 sales
1995 net icome
Estimated beta coefficient
Debt ratio
Tax rate
Shares outstanding
Latest price per share
Pro forma data assuming CCI is operated by Computech starting in 1996:
1996 Assets (end of year)
1996 sales
1996 net income
Debt ratio
Tax rate
Sales growth 1996-1999
Assets growth, 1996-1999
Long-run growth rate in sales and assets
Other data and assumptions, post-merger:
Risk-free rate
Market risk premium
Company's cost of debt
Variable costs/sales
Fixed costs/assets
Depreciation/assets
Valuation multiples (averages for young, rapidly growing software firms):
Value as a multiple of cash flow
Value as a multiple of sales
Value as a multiple of net income
Value as a multiple of market/book
Question 3

Table 2
Balance Sheet Information (end of year)
Assets
Debt

$
$

1996
3,450,000 $
862,500 $

1997
3,967,500
991,875

Income and Cash Flow Statements

Net Sales
Var.operating costs
Depreciation
Fixed operating costs
Interest expense
Earnings before taxes
Taxes
Net income
Plus Depreciation
Cash flow
Req'd addn to equity
Available CF
Expected terminal value
Free Cash Flow

$
$
$
$
$
$
$
$
$
$
$
$

Maximum total offer, total:

Maximum offer price per share

$
$

1996
12,000,000
10,694,350
276,000
690,000
86,250
253,400
101,360
152,040
276,000
428,040
388,125
39,915

$
$
$
$
$
$
$
$
$
$
$
$

39,915 $

1997
14,400,000
12,833,220
317,400
793,500
99,188
356,693
142,677
214,016
317,400
531,416
446,344
85,072
85,072

10,500,000
3.50

Ratios:
1996
1.27%
4.41%
5.88%
3.48
25%

Return on Sales
Return on assets
Return on equity
Total Assets Turnover
Debt/Assets

Question 4
r (sL)

r(RF) + r (market premium) * beta

Question 5
HVUL =
V=

Question 7

$
$

6,220,014.01
4,046,634.27

1997
1.49%
5.39%
7.19%
3.63
25%

Current price

appraised value
appraised stock price

$ 18,711,198.49
$
3.74

Value
Value
Value
Value

as
as
as
as

a
a
a
a

multiple
multiple
multiple
multiple

Available CF

of
of
of
of

1.50

Market value

1
9
0.6
11
4.5

cash flow
sales
net income
market/book

1996
800,000.00 $

1997
1,050,000.00

800,000.00 $

1,050,000.00

$
3,000,000.00
$ 10,000,000.00
$
425,000.00
1.6
10.00%
30.00%
3000000
$
1.50

Unlevered Nero's beta=

Revelered Nero's beta=

$
3,450,000.00
$ 12,000,000.00
$
808,650.00
25%
40%
20%
15%
5%

6.5%
5.0%
10.0%
89.1%
20.0%
8.0%

10
0.5
12
3.5

$
$

1998
4,562,625 $
1,140,656 $

1999
5,247,019
1,311,755

$
$
$
$
$
$
$
$
$
$
$
$
$

1998
17,280,000
15,399,864
365,010
912,525
114,066
488,536
195,414
293,121
365,010
658,131
513,295
144,836

1999
20,736,000
18,479,836
419,762
1,049,404
131,175
655,823
262,329
393,494
419,762
813,255
196,763
616,492
17,667,625.37
18,284,118

1998
1.70%
6.42%
8.57%
3.79
25%

1999
1.90%
7.50%
10.00%
3.95
25%

$
$
$
$
$
$
$
$
$
$
$
$
$
144,836 $

15.41%

1996
39,915.15 $

1997
85,071.93

39,915.15 $

85,071.93

HVUL

7,500,000.00

Multiple
$
6,220,014.01
$
5,548,430.21
$ 12,441,600.00
$
4,328,431.21
$
5,902,896.09

$
$

1998
1,372,500.00 $
$
1,372,500.00 $

weight = judgmental
x
x
x
x

1999
2,435,625.00
6,718,510.96
9,154,135.96

0.5
0.2
0.2
0.1

=
=
=
=

for multiple
NPV = maximum total offer=
maximum price per share=

1.48
1.78

$
$

1998
144,836.44 $
$
144,836.44 $

1999
616,492.25
6,220,014.01
6,836,506.26

$
$
$
$
$

2,774,215.11
2,488,320.00
865,686.24
590,289.61
6,718,510.96

ximum total offer=

price per share=

$
$

7,534,950.47
1.51

1
2
3

MODEL-GENERATED DATA:

4
5

Discount Rate Analysis

Premerger beta
Postmerger beta

6
7
8
9
10
11
12
13
14
15
16
17
18

Assets, end-of-year
Debt, end-of-year
INCOME STATEMENT INFORMATION:

34
35

Net sales
Var. Operating Costs
Depreciation
Fixed Operating Costs
Interest expense

38
39
40
41
42
43
44
45
46
47
48

1.00
========

Product
8,833,628
1,751,114
1,036,800
3,667,477
1,377,342
-----------16,666,362
============

1,996.00
0.07
0.23
0.31
3.48
0.25

1,997.00
0.07
0.25
0.34
3.63
0.25

1,998.00
0.07
0.27
0.36
3.79
0.25

1,999.00
0.07
0.29
0.39
3.95
0.25

1,996.00
3,450,000
862,500

1,997.00
3,967,500
991,875

1,998.00
4,562,625
1,140,656

1,999.00
5,247,019
1,311,755

1,996
12,000,000
9,600,000
276,000
690,000
86,250
---------1,347,750
539,100
---------808,650
276,000
---------1,084,650
388,125
---------696,525

1,997
14,400,000
11,520,000
317,400
793,500
99,188
---------1,669,913
667,965
---------1,001,948
317,400
---------1,319,348
446,344
---------873,004

1,998
17,280,000
13,824,000
365,010
912,525
114,066
---------2,064,399
825,760
---------1,238,640
365,010
---------1,603,650
513,295
---------1,090,354

1,999
20,736,000
16,588,800
419,762
1,049,404
131,175
---------2,546,859
1,018,744
---------1,528,116
419,762
---------1,947,877
196,763
---------1,751,114
16,666,362
---------18,417,475
==========

BALANCE SHEET INFORMATION:

32
33

36
37

Weight
0.50
0.10
0.10
0.20
0.10
--------

Return on Sales
Return on Assets
Return on Equity
Total Asset Turnover
Debt/Assets

30
31

1.48
15.41%

Valuation
17,667,256
17,511,139
10,368,000
18,337,387
13,773,424

Wtd. avg. = expected 1999 value:

21
22

28
29

Multiple
N/A
10.00
0.50
12.00
3.50

Pure DCF
Multiple of cash flow
Multiple of sales
Multiple of net income
Market/Book multiple

RATIO ANALYSIS:

25
26
27

Unlevered beta
Discount rate

TERMINAL VALUE ANALYSIS--ALTERNATIVE 1999 VALUATIONS:

19
20

23
24

1.60
1.78

Earnings before taxes

Taxes
Net income
Plus depreciation
Cash flow
Req'd addn to equity

49
50

Available CF
Expected terminal value

51
52
53

Free cash flow

54
55

Maximum total offer, total:

Maximum offer price per share:

---------696,525
==========

------------------873,004
1,090,354
========== ==========
12,350,778
4.12

G
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3
4
5
6
7
8
9
10
11
12
13
14
15
16
17

18
============
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
54
55

5,509,370
1,377,342

DATA FOR VALUATION GRAPH:

Price/Share
for Target
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
2.50
2.75
3.00
3.25
3.50
3.75
4.00
4.25
4.50

Total Paid
for Target
0
750,000
1,500,000
2,250,000
3,000,000
3,750,000
4,500,000
5,250,000
6,000,000
6,750,000
7,500,000
8,250,000
9,000,000
9,750,000
10,500,000
11,250,000
12,000,000
12,750,000
13,500,000

Gain to
Acquirer
12,350,778
11,600,778
10,850,778
10,100,778
9,350,778
8,600,778
7,850,778
7,100,778
6,350,778
5,600,778
4,850,778
4,100,778
3,350,778
2,600,778
1,850,778
1,100,778
350,778
(399,222)
(1,149,222)

Gain to
Target
(4,500,000)
(3,750,000)
(3,000,000)
(2,250,000)
(1,500,000)
(750,000)
0
750,000
1,500,000
2,250,000
3,000,000
3,750,000
4,500,000
5,250,000
6,000,000
6,750,000
7,500,000
8,250,000
9,000,000

Total Paid for Targ

Chart Title

Total Paid for Target

Gain to Acquirer

Gain to Target