An Investment Analysis Report on Ideko Corporation

Advanced Corporate Finance
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Advanced Corporate Finance
An Investment Analysis Report on Ideko Corporation
Introduction
Ideko Corporation is a privately owned manufacturer and also the designer of sports eyewear situated in Chicago. June Wong is the founder of the company who made the decision to sell the business after having successfully relinquished the relevant management control strategies. The total number of assets in the firm are close to $867 million, with yearly sales of about $75 million, all of which clearly depict that the corporation is profitable with a net profit of 9.3%. Being among the KKP investment partners, there is much investigation being carried out in order to determine if a particular deal can be reached and acquisition takes place at the end of a fiscal year. As such, there is an immense plan to facilitate the implementation of various financial and operational improvements at the Ideko corporation in the future, an idea that intends to sell the business. Additionally, it is crucial to estimate Ideko's corporation value based on other comparable firms and the building of various financial models that are essential in projecting cash flows that majorly reflect the operation improvements within the company. Forecasts of cash flows enable individuals to value the firm using the relevant APV model discussed in the previous chapters. The exploration of the importance of various valuation estimates relating to the main assumption in this case study is also crucial to ensuring an effective investment analysis report of the Ideko corporation.
Valuation Methods
i)Comparable Company Analysis (CCA)
Comparable Company Analysis is utilized in the evaluation of the value of a company using metrics of other relevant businesses of a particular size though in the same industry. As such, most analysts usually combine a list of statistics related to the companies being calculated and reviewed, thus considering various valuation multiples to effectively compare them (Pinto,2020).
As for this case, the best way to compare the effectiveness of the proposed price of Ideko is to relate it to other publicly traded companies using the comparable firm's method. It is much easier to compare Ideko with other companies in a similar business line despite the fact that there is no other company that is exactly similar to it. The closest competitors to the Ideko firm include the Nike Inc. company, the Luxottica group, and the Oakley company, all of which also design sports eyewear. A close evaluation of the firm in the sporting group industry is illustrated in the Table below:
Ideko’s Financial Performance in the Mid 2005
Ratios

Ideko

Luxottica Group

Nike Company

Oakley Company

Sporting Goods Industry

EV/Sales

2.0x

2.7x

1.5x

2.0x

1.4x

P/E

21.6x

28.0x

18.2x

24.8x

20.3x

EV/EBITDA

9.1x

11.6x

9.3x

11.6x

11.4x

EBITDA/sales

21.7%

17.0%

15.9%

17.0%

12.1%

The Table illustrates each company's enterprise value in comparison to those of Ideko corporation. Enterprise value is obtained by getting the total value of equity plus the net debt, all of which the net debt refers to the debt less the firm's investment and cash in various marketable securities that are not relevant during the company's market operations. As such, the company has close to $45 million in debt and holds close to $6.5 million as the working capital needs of the firm.
In comparing the ratios of all the firms, Ideko corporation has a lower P/E as compared to those of Luxottica and Oakley though it is somehow higher than those of the Nike company and all other companies as a whole. A higher P/E ratio indicates that the company's acquisition price is much reasonable compared to those of other firms that deal in similar goods, thus implying that the business products are a better investment opportunity. To determine whether the investment opportunity is sustainable, a careful analysis is required that would aid in the determination of various operational aspects of the firm and the ultimate cash flows that are expected to generate the relevant return to the company. The various comparable provided above provide a relevant starting point in aiding determine whether the relevant acquisition is a successful investment of the KKP investments on the Ideko’s corporation performance. It is crucial to carefully investigate into Ideko’s investments, operations, and capital structure to carefully access its potential for future growth and improvements.
ii)Precedent Transaction Analysis
Precedent Transaction Analysis constitutes a valuation method in which the price issued for similar companies initially is considered as a better indicator for the company’s value. Data sources crucial for the precedent financial analysis entail the securities related to the data corporation, all of which are usually the repository of acquisitions and mergers of information. Annual filings, research reports and various trade publications are also relevant sources of data in precedent transaction analysis.
The valuation method technique comes up with an estimated value of the stock share when acquisition occurs. The technique is advantageous in determining transactions that are relevant among similar companies. The idea is usually made effective by first choosing companies based on their financial characteristics and also those in the same transactions' strategies ("Precedent transaction analysis definition," n.d.). The financial transactions that recently occurred are usually considered more valuable than the various terms of the usefulness of the analysis.
A comparison of Ideko corporation to other companies in a similar line of business can be a perfect indicator for the company's value. As such, the comparison in valuation among the firms involved gives business people an assurance that the acquisition price in the company's future can easily be forecasted, thus a clear indication that the acquisition is usually a good investment opportunity for the KKP investors. Additionally, her is great importance in doing away with differences like growth and operational efficiency that may not reflect on the investors' plans to enhance the Ideko's financial operations. To determine whether the investment is attractive, careful financial analysis must be conducted on both the operational aspects of the firm and the ultimate cash flows determined, all of which deal with the generation of relevant returns to the company.
iii)Discounted Cash Flow
Discounted cash flow is utilized in the determination of a security or the value of business. It gives the representation of the business value or that of any investor who would be willing to pay for any available investment opportunities, all of which need a rate of return on the investments, the discount rate (Li et al., 2017). Discount cash flow are advantageous in this case since they aid give the value of an entire business, the value of any investment within the company, valuing the benefits of cost saving initiative of a company and the approximated value of anything that may impact the cash flow within an organization.
As for the case of Ideko corporation, it is crucial to take into account the money’s time value or the relevant return rate that the investors expect to receive. The Discount cash flow formula majorly takes into account the return that the investors expect to earn and the value in how much they are willing to pay for something so that they can exactly receive the return rates. As such, if an individual pays less that the Discount cash flow value, the rate of return will be much higher than the discounted rate while if they pay more than the discount cash flow value, the rate of return will be lower that the discounted rate.
Ideko’s Cash Flow for the year 2005-2010
The discounted cash flow approach to continuation value details more on the various ways in which the firms’ sales are expected to grow and their expenses remain at a fixed percentage of sales with an increase in their unlevered income rates. The data of the corporation's cash flows indicate that the firms' payables, receivables and other elements of networking investment capitals are likely to rise in the near future. In this case, the debt and cash balances of Ideko corporation need to be adjusted by deducting the excess money that is usually utilized in funding transactions and later introducing the new debts incurred. The steps are crucial in completing the proforma balance sheet, all of which will be required in adjusting the cash balance so as to reflect the change in cash. The current liabilities and assets are derived from the networking capital. Inventory entries on the balance sheet entail both finished goods and raw materials, while the equipment information and property plan are all derived from the capital expenditure worksheet.
On the other hand, the discounted stock equity is expected to rise yearly via retained earnings and other various new capital contribution. The dividends after the year 2005 equate to a positive cash flow to equality while the negative cash flows represent stock issuance. Based on the data provided, the balance sheet does not balance though the total liabilities are usually equal to any corporation's total assets. Ideko's corporation book value is expected to decrease in the coming years since as the firm reduces its working capital and pays its savings as part of dividends, the corporation's value is prone to rise as it expands.
The Business Plan
Ideko's corporation business plan entails a closer look at various investments, operations, and capital structures, all of which are crucial for the company's future growth. Operational movements within the company are a bit optimistic of the firm's business prospects. The market price is to grow by close to 5% yearly since the company produces a superior good in the market. The market share has risen in the past years because the managerial staff members are mainly dedicated to ensuring effective management of the company's insufficient resources to sales, marketing, and the development of products within the company. The Table on the company's cash flow illustrates that the firm's current administrative expense is close to 18% (13500/75000) =18%, a rate that surpasses its expenditures on marketing of their products. By contrast, other of its competitive corporations utilize less er money on their administrative overheads than what is done on sales and marketing. As such, the KKP plan's implementation is aimed at cutting costs and redirecting resources to the sales and marketing of the company’s products. By engaging in such, it is believed that the market share for the company is likely to rise from 10% to 15% in the next year...