Forecasting Balance Sheet, and Cashflows

The information we have calculated so far can be used to project Ideko’s balance sheet and statement of cash flows through 20Y0. While these statements are not critical for our valuation, they often prove helpful in providing a more complete picture of how a firm will grow during the forecast period.

Forecast Free Cash Flows


Forecast Balance Sheet


For the balance sheet, we must begin by adjusting Ideko’s closing 20X5 balance sheet to account for the transaction. The transaction will affect the firm’s goodwill, stockholders’ equity, and its cash and debt balances.

20X5 ProForma B/S

We show these changes by constructing a new “pro forma” 20X5 balance sheet that represents the firm just after the transaction closes. Considering each change:

Goodwill

Calculate goodwill as the difference between the acquisition price and the value of the net assets acquired:

\[\begin{align*} & \text{New Goodwill} = \text{Acquisition Price} - (\text{Value of Net Assets Acquired} \end{align*}\]

In this case, the acquisition price is the $150 million purchase price for Ideko’s existing equity. For the net assets acquired, we use Ideko’s existing book value of equity, $77.668 million, excluding any pre-existing goodwill ($0). Thus, new goodwill is 150 - (77.668 - 0) = $72.332 million.

Stockholders’ Equity

Next, consider stockholders’ equity, which we calculate as:

\[\begin{align*} & \text{NewStockholders’Equity} = \text{EquityContributions} - (\text{ExpensedTransactionFees} \end{align*}\]

In this case, we deduct the $5 million in advisory fee expenses from Kleiner Perkins’ initial equity contribution of $53 million to calculate new shareholders’ equity of $48 million.

Cash & Debt

Finally, we adjust Ideko’s cash and debt balances by deducting the excess cash of $6.5 million used to help fund the transaction, eliminating Ideko’s existing debt (which will be repaid), and adding the new debt incurred of $100 million.

B/S Going Forward

To construct the balance sheet going forward, adjust the cash balance to reflect the change in cash from the statement of cash flows. As we can see, Ideko’s book value of equity will decline in 20X6, as Ideko reduces its working capital and pays out the savings as part of a large dividend. The firm’s book value will then rise as it expands.

Current Assets & Liabilities

All other current assets and liabilities come from the net working capital spreadsheet (Ideko - Forecast Net Working Capital). The inventory entry on the balance sheet includes both raw materials and finished goods.

Property, Plant, & Equipment

Property, plant, and equipment information comes from the capital expenditure spreadsheet (Ideko - Capital Expenditure Plan), and the debt comes from here (Ideko - Capital Structure).

Stockholder’s Equity

Stockholders’ equity increases each year through retained earnings (net income less dividends) and new capital contributions (stock issuances net of repurchases).

Dividends

Dividends after 20X5 are equal to positive free cash flows to equity from Ideko - Forecast Free Cash Flows, whereas negative free cash flows to equity represent a stock issuance. As a check on the calculations, note that the balance sheet does, indeed, balance: Total assets equal total liabilities and equity!