1.

Building blocks for valuation

The key element that distinguishes Print-to-Fit from other companies is the patent they have
on the technology with which they print customer designs on blank apparel items. In this way
they have created a unique market position. Research and development skills are very
important in their business.

2. Risk profile
Print-to-Fits business is protected by a patent on the technology to manufacture printers that
can print customer designs on apparel items. However, the risk another company will invent
another way to easily print designs on clothing, and thereby by-pass this entry barrier, is likely
and increases their risk profile. If Print-to-Fit would be able to manage its activities in a
sustainable way by depleting competitive advantages, it would continue to hold a good
market position with great future perspectives since there is a growing trend to be noticed
towards customer preference for unique, customized products. A problem that will appear
when this doesn't succeed is their limited diversification of products, which would have a
negative impact on the risk profile. Furthermore Print-to-Fit is not very dependent on specific
suppliers since a lot of companies produce items needed to make printers, which decreases
the height of its risk profile. On the other hand, Print-to-Fit is quite dependent on its
customers: companies and stores who believe in the idea to let customers design their own
clothes, which increase the risk profile of Print-to-Fit. In short we can conclude that the risk
profile of Print-to-Fit is not that high but that it is likely to increase because of possible
competition that is likely to enter the market in the future if the concept appears to be a
success and if the research and development departments of possible competitors find ways
to by-pass the patent.

3. Fixed assets

The fixed assets are not enough specified to compare the market value and the book value.
We cannot assess revaluation surpluses that lead to tax effects either. There are no
contractual provisions concerning rent to pay on fixed assets on the balance sheet. The
company is planning to expand its plant, equipment and its other assets heavily in the
upcoming years.

4. Equipment and machinery

5. Return

When looking at the return on equity of Print-to-Fit we notice this return is very high and will
decrease to a lower, but still quite high, level according to the conservative foresights. We do
not have enough information to assess whether normalization processes are needed but we
have to take in consideration that this could be necessary and would change our results.
Return on equity

1993
0,41

1994
0,24

1995
0,18

1996
0,20

1997
0,18

6. Excess resources
If we calculate excess cash by calculating operating cash by taking 8% of the sales and
deduct this amount of the cash and marketable securities we find the results below. 1 The fact
excess cash is very low is a good thing since the presence of a lot of excess cash in an
enterprise would not be attractive for a potential buyer of the company. We do not have
enough information to assess other possible excess resources but do notice Print-to-Fit has
very high inventories.

1 Course material Advanced Financial Statement Analysis: Palepu, Healy, & Peek
(2013), ''Business Analysis & Valuation, IFRS edition''

Excess cash

1993
0

1994
0

1995
0

1996
256,53

1997
544,01

7. Working capital requirements

The working capital requirements are lower at the time of the valuation than the normal
expected future values. We do not have enough information to assess possible over- or
undervaluation.
NWC

1993
1582,4

1994
2705,1

1995
4409,9

1996
4179,1

1997
5924,6

8.Hidden liabilities
We don't have a lot of useful information concerning possible hidden liabilities but we do,
however, consider it likeable social liabilities to be present (amount depends on the amount of
personnel). Furthermore we notice Print-to-Fit has quite some investment plans concerning its
plant and equipment and its other current assets.

9. Hidden assets

Print-to-Fit has distinguished itself clearly from other companies by the techniques created by
their research and development department. This implies hidden knowhow in the department,
which leads to R&D results.

2 Building blocks for discounted cash flow valuation

INVESTMENT IN NCWR
Trades receivable
+ Inventories
- Trades payable
NWC
NWCR2 = NWC

T0
(1993)

T1
(1994)

T2
(1995)

T3
(1996)

T4
(1997)

1200,7
1225,2
843,5
1582,4

2046,8
2409
1750,7
2705,1
1122,7

2762
3019,2
1371,3
4409,9
1704,8

2893,6
2769,1
1483,6
4179,1
-230,8

3912,9
3672,3
1660,6
5924,6
1745,5

2 NCWR= inventory+ accounts receivable - accounts payable

CAPEX
Accumulated depreciation
Yearly depreciation
Net plant and equipment
Yearly changes
CAPEX (yearly depreciation + yearly
changes in net fixed assets)
CHANGE IN OTHER ASSET
Other assets
Changes in other assets

89.7
69.9
2572
1561.2
1631.1

184.2
94.5
2572.3
0.3
94.8

305.4
121.2
2459.3
-113
8.2

490.2
184.8
2148.4
-310.9
-126.1

227

750,6
523,6

925,5
174,9

1367,8
442,3

1601,3
233,5

-29,8

-80

-227,6

-158,8

-203,6

1162,2
81

937,21

1134,6
42

1166,277

With debt taxes = (EBIT-interest) * 0,37

1191,8
81

1021,4
22

1193,3
98

1241,609

Tax advantage

-29,6

-84,212

58,756

-75,332

DEBT INCREASE3
Change in nonconvertible debt
Change in capitalized leases
Change in current debt obligations
Net debt issuance

105,7
13,8
328,9
448,4

1006,9
-6,4
205,9
1206,4

-26,9
9,3
-733,6
-751,2

-33,9
3,5
678,2
640,8

INTEREST EXPENSE
Interest expense

19.8
1010.8

TAX ADVANTAGE
No debt tax (EBIT *t) = EBIT * 0,37

Building block 2 Discount rate

Only 0,5 of
short term debt
is financial

Rescale
to 100%

Ke (cost of equity)

14%

E/(D+E)

70,00%

70%

77,78%

Kdlt (cost of long

6,300
%

Dlt/(D+E)

10,00%

10%

11,11%

4,41%

Dst/(D+E)

20,00%

10%

11,11%

3 Debt consists of current debt and non-current debt. Changes in capital leases are also among non
-current debt because we assume an implicit interest rate. Course material Advanced Financial
Statement Analysis: Palepu, Healy, & Peek (2013), ''Business Analysis & Valuation, IFRS edition''

100%

WACC = 12,079%

90%

100%

Building block 3 Growth rate

10%
2,00
%

1
FCFF

Discoun
ted with
Wacc
12.079
%
Present
value
19941998

135
6,87
121
0,64

10

11

12

13

14

27
9,5
7
22
2,5
6

173
7,28
123
3,95

285,
80
181,
12

314,
38
177,
76

345
,82
174
,46

380
,40
171
,23

418
,44
168
,05

460
,28
164
,93

506,3
1
161,8
7

556,
94
158,
87

612
,63
155
,92

673
,90
153
,03

741,
29
150,
19

13
188
2,4
2

14

665
,72

676,
02

$
-18,1
3

Present
EQUITY
DCF VALUATION
$1.6
value
36,3retail sector
Levered beta
19983
R
f
2008

1,03
5,75%

Risk premium
Terminal $1.5
Unlevered
beta = asset beta
value
19,9
Cost of equity
without debt
9
Total
firm
value

$3.1
38,1
9

FCFE
Discoun
ted with
Ke
8.32%
Present
value
19941998
Present
value
19982008
Terminal
2008infinity
Total
equity
value

8,010%
0,321372855
8,32%

1
958,
87

2
78
3,4
4

885,
19

66
7,6
6

8
116
8,8
3

9
128
5,7
2

10

11

965
,98

7
106
2,5
8

1414,
29

155
5,72

12
171
1,2
9

886,
04

798,
33

878,
16

697,
07

579,
81

588,
78

597
,88

607
,13

616
,53

626
,07

635,7
5

645,
59

655
,58

207
0,66

$
1.05
9,35
$
6.31
5,04
$10.
903,
33
$18.
277,
71

Discounted cash flow to the firm and to equity

4 Crosscheck - Multiples
As an alternative valuation method we use the multiples method as a crosscheck for the
enterprise-DCF and equity-DCF method. To use this method, assumptions need to be made.
Therefore we assume that:
1. The company is perfectly comparable (this means operational as well as financial).
2. The value of the comparable company is correct.
Although Print-to-Fit is a computer manufacturing company, the firms future lays in the
retailing business. According to the rules of thumb a common used multiple for the retail
industry is P/S. To use this multiple we add an extra assumption:
3. Leverage is similar across firms.

Using the general retail multiple4 we find the following numbers:

0,60

P/S

P/S

P/S

P/S

Multiple (Retail Industry)

0,6

0,6

0,6

0,6

Financial parameter

Sales 94

Sales 95

Sales 96

Sales 97

Amount (Sales)

13892

17859,3

18220,9

21592,4

Entreprise value

8335,2

10715,58

10932,54

12955,44

Financial debt

152,3

1168,8

1196,9

1141,2

Equity value (before ill. disc.)

8182,9

9546,78

9735,64

11814,24

range price (listed firm)

8182,9

Equity value (after ill. disc., 25%)

6137,175

7301,73

8860,68

range price (private firm)

6219,004

- 11814,24
7160,085
- 8978,8224

We use a benchmark of 25% for the illiquidity discount since this percentage is used for a firm
with positive earnings and $10 million revenues. 5
Regarding the calculation, we multiply the P/S multiple for retail industry with the amount of
Sales from Print-to-Fit to become the enterprise value. In order to calculate the equity value
we extract the financial debt. Instead of using the average we chose for the range between
the minimum and the maximum among the different years. We assume that Print-to-Fit is a
private firm so the illiquidity discount is relevant.

Recommendations:
The equity-DCF value of Print-to-Fit (PTF) is $18.277,71 (in thousands), based on the
calculation. The acquisition price of PTF is $20.033 (in thousands), based on what the PTF
shareholders are willing to accept. The difference between acquisition price and equity value
is -$1.755,29 (in thousands), which is the supplement Nickels has to pay. In our calculations
we have incorporated the surplus value of the patent and synergie between both companies
in a 10% expected growth rate for the first coming 10 years (1998-2008). Based on that
information, we can conclude that buying PTF isnt a good deal for Nickels.If we assume that
the 10% expected growth rate (EGR) reflects a conservative scenario, we can make a range to
add a realistic (with a 12% EGR) and optimistic scenario (with a 15% EGR). The equity-DCFvalues in the realistic scenario of $21.113,62 (+$1.080,62) and optimistic scenario of
$26.241,29 ($+6.208,29) are above the the acquisition price and add a surplus value. In these
cases, it would be a good deal for Nickels to purchase PTF.
The main value creating initiative is improving NWCR through reducing the inventory, by Justin-time production (consumer could design their own clothing) and by decreasing the
assortment (small set of pattern masters). The range in which the value of PTF could go up
lays between $22.814,37 and $25.082,71 by reducing inventory with 20% to 30%. We think
that this is an achievable improvement and therefore it would be legitimate to buy PTF.

4 Damodaran: http://people.stern.nyu.edu/adamodar/
5 Damodaran: www.pages.stern.nyu.edu/~adamodar/New_Home_Page/valquestions/illiquiddisc.htm