Abstract
Rosser Inc. (RI), 100% export oriented unit (EOU) and in the manufacturing business of tobacco and cigarette, is a wholly-owned subsidiary of its listed parent firm. The parent firm, a sizable player in the same industry with a number of well-known brands in its portfolio, has recently decided to float the Initial Public Offering (IPO) of its subsidiary to raise equity. This paper deals with the valuation of RI and highlights several issues in financial and business valuation, such as Discounted Cash Flow (DCF). The paper attempts to present an analysis on forecasting uncertain cash flows, uneven investment for expansion, and hidden managerial flexibility. Valuing a small private firm is a very challenging exercise to understand most of the pertinent financial principles, such as asset pricing. Valuation of such firms particularly involves an in-depth consideration of issues like the level, timing, and variability of expected cash flows, opportunity cost of capital, growth rate calculation, and related considerations. Hence the application of Monte Carlo simulation is demonstrated via popular spreadsheet add-in, Crystal Ball®.
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