Team Case Saito Solar – Discounted Cash Flow Valuation

I need a 1.5-2 page response in total to these question and calculations. Professor uses turnitin so please refrain from AI use. citations in APA format. Attached is the rubric and the case study. Here are the instructions:

Instructions

You can find the Team Case in the Harvard link within the syllabus. Please post your Word document here and your Excel work to the Drop Box. All team members should submit.

Answer the questions outlined in the case and below. Similar to prior assignments, I do not have a specific page count requirement but expect 4-5 pages, APA format.

Here are the Questions for the Saito Case:

5. Based on the free cash flow forecast provided in Appendix 3 of the case, and assume a range of 9-11% WACC and 1-3% terminal value growth rate, what is the range of values for Saito Solar?

6. Strategically, do you think Mr. Saito and his partners should sell the firm at this time?

For the exclusive use of M. Kyle, 2024.
TB0357
Lena Booth
Frank Tuzzolino
Saito Solar—Discounted Cash Flow Valuation
On a late November morning in 2012, a boutique investment bank in Japan approached Mr. Takuya Saito,
founder and CEO of Saito Solar, about his interest in selling the firm. Even though selling the firm had crossed
his mind occasionally in the past, Mr. Saito had never seriously thought about who would be a potential buyer
and how much the firm could realistically be sold for. He was excited about the interest shown by the investment
bank, yet skeptical about how large the offer might be, in light of the declining sales in recent years. Nevertheless,
he invited his two silent partners, Mr. Kenta Suzuki and Mr. Shinji Yoshida, to gather in his office to discuss
this unsolicited proposal.
Saito Solar and the Solar Energy Industry
Saito Solar is a privately owned photovoltaic (PV) solar panel manufacturer founded by Mr. Takuya Saito in 2002.
Mr. Saito worked as an electrical engineer for Monsanto Electronic Materials Company (MEMC), a silicon-wafer
company, right after finishing graduate school in the U.S. In 2000, after several years of dismal financial results,
MEMC was acquired by Texas Pacific Group, a private equity firm, for a symbolic dollar plus $150 million of
credit lines. It was then that Mr. Saito decided to return to his homeland, Japan.
Mr. Saito had always been intrigued by, and was a big believer in, alternative energy while he was in the
U.S. He was particularly interested in solar energy and had spent many of his leisure hours studying the various
processes of solar energy production. He understood how solar cells, electrical devices that are used to generate
electricity from sunlight through photovoltaic effect, were connected electrically, usually in a series as a module.
Multiple solar cells were then integrated into groups, all arranged on one plane, forming a solar panel. His research
also showed that most of the solar panels in the world were made of either mono-crystalline or polycrystalline
(also called multi-crystalline) silicon solar cells, with those made of thin-film solar cells accounting for only a
small fraction of the overall solar market.
Mr. Saito believed Japanese residential and commercial properties would use a lot more solar energy if solar
panels were durable and cost effective. After months of extensive industry research, he determined that solar
panels made of polycrystalline silicon cells would have the most potential in Japan. Polycrystalline silicon costs
less to produce compared to mono-crystalline because in this process, raw silicon is melted and poured into a
square mold, which is then cooled and cut into perfectly square wafers, resulting in less waste. While the efficiency
level is slightly lower than mono-crystalline silicon, polycrystalline silicon-based solar panels are more cost effective and would be very appealing in Japan, especially to residential customers. The thin-film solar panels, while
cheap to manufacture, are the least efficient in producing electricity.1 They take up four times as much space as
the mono-crystalline silicon-based panels to produce the same amount of electricity, making it very impractical
for Japanese residential customers.
Mr. Saito spent the next few months soliciting capital to start his company. As a newcomer to the solar industry, he encountered many roadblocks, especially from banks and finance companies. Even though he had saved
some money during the 20 years he worked at MEMC, it was not enough to start a solar panel manufacturing
Mathias Aarre Maehlum, “Which Solar Panel Type is Best? Mono- vs. Polycrystalline vs. Thin Film,” June 27, 2013.
(http://energyinformative.org/best-solar-panel-monocrystalline-polycrystalline-thin-film/)
1
Copyright © 2013 Thunderbird School of Global Management. All rights reserved. This case was prepared by Professors Lena
Chua Booth and Frank Tuzzolino for the purpose of classroom discussion only, and not to indicate either effective or ineffective
management.
This document is authorized for use only by Michael Kyle in MBA 623 Summer II taught by Caitlin Forehand, Walsh University from Jun 2024 to Aug 2024.
For the exclusive use of M. Kyle, 2024.
Exhibit 1. Various Types of Solar Panels
firm, even at a small scale. Finally, through family ties, he was able to convince a couple of his father’s wealthy,
long-time friends, Mr. Suzuki and Mr. Yoshida, to contribute the remaining needed capital to start Saito Solar.
Saito Solar was a niche player serving residential and small commercial customers, with superior customer
service as its hallmark. Mr. Saito recruited many of his customers by first educating them on the importance of
alternative energy for Japan, and how they could play a role in helping the environment by adopting solar energy
for their homes or businesses. Coupled with the exponential growth of the Japanese solar industry during that
time, Saito Solar’s revenue grew more than eight-fold from 2002-2008. It was able to prosper along with other
industry leaders in Japan such as Sharp, Kyocera, Mitsubishi, and others.
In 2008, the global financial crisis hit. Energy prices fell significantly, bringing down the demand for alternative energy, including solar power. At the same time, many Chinese solar companies, such as Suntech, Yingli
Solar, and Trina Solar, flooded the market with solar panels that were 30-40% cheaper than those made in Japan.2
Even though the quality of Japanese solar panels was considered superior, the cost difference was too big in this
rapidly commoditized industry for Japanese companies to compete in the world market. Many industry leaders
in Japan, such as Sharp and Kyocera, suffered loss of market share. Saito Solar had a hard time competing as well,
with its revenue steadily declining and net profit margins declining also, to about 4.2% in 2012 (see Exhibit 2).
From 2009-2012, crude oil prices started to creep back up, reaching over US$100 per barrel in parts of
2011 and in the spring of 2012. World demand for solar energy rose rapidly again, boosted also by the feed-in
tariffs implemented by many nations around the world.3 In Japan, a deadly earthquake hit in 2011, causing
explosions and problems at some of the nuclear power plants that were compounded by the ensuing tsunami.
Ahbishek Shah, “Will Cheap Chinese Solar Panels Invade Japan?” July 17, 2012. (www.greenchipstocks.com/articles/
japan-solar-companies/2056)
3
A feed-in tariff, also called advanced renewable tariff or renewable energy payment, is a mechanism used to promote
investment in renewable energy technologies. This is often achieved by offering renewable energy producers long-term
contracts at an attractive price to ensure they achieve superior return. As for 2010, more than 50 nations have enacted feedin tariff policies. See http://en.wikipedia.org/wiki/Feed-in_tariff for more details.
2
2
TB0357
This document is authorized for use only by Michael Kyle in MBA 623 Summer II taught by Caitlin Forehand, Walsh University from Jun 2024 to Aug 2024.
For the exclusive use of M. Kyle, 2024.
Exhibit 2. Saito Solar’s Revenue and Net Profit Margin
At the time of the earthquake, Japan had 54 nuclear reactors and 17 power plants that produced about 30% of
Japan’s electricity.4 In addition to the threat from radiation, many areas of Japan were without power. Nearly
sixteen thousand people died and the Japanese economy suffered severely, causing damage totaling about US$300
billion. The earthquake and tsunami gave Japan a sense of urgency to look for alternative energy. On June 18,
2012, the Japanese government approved a new feed-in tariff of 42¥/kWh (about US$0.53/kWh) for solar energy
that would take effect on July 1, 2012. This tariff was almost twice as large of that in Germany, the country with
the largest solar energy capacity in the world, and three times of that in China. With this new tariff, Japan was
predicted to generate at least US$9.6 billion of new investments in solar installations, according to Bloomberg
New Energy Finance forecast.5 These investments were expected to generate up to 3.2 GW of additional capacity,
about the output of three nuclear plants, and would rank Japan as one of the largest in the world in solar capacity.
Valuation of Saito Solar
It was early afternoon when the two silent partners, Mr. Suzuki and Mr. Yoshida, arrived at Mr. Saito’s office.
They were both very excited about the solicitation and wanted to know how much the offer was. Mr. Saito
explained that the investment bank revealed nothing unless owners of the firm agreed to open up a conversation
about the sale. That was the main reason he wanted to meet with his two partners. Besides figuring out if the
partners were receptive to the sale of the company, Mr. Saito also wanted to know if they had some idea as to
how much they would sell the company for.
Mr. Yoshida’s Valuation
Mr. Yoshida was especially interested in the sale of the firm because he needed the cash to invest in his son’s new
venture. He was a retired mechanical engineer who made some of his earlier fortune through a few lucrative real
estate deals during the Japanese real estate boom in the late 1980s. He had since invested in a few businesses, all
as a minority, silent partner, including Saito Solar. He thought that Saito Solar should be worth about ¥5 billion.
His calculation was simple and straightforward. He argued that the firm was generating about ¥250 million of
net cash flows per year, and he believed these cash flows were likely to continue for the next 20 years. He came
out with ¥5 billion by simply multiplying ¥250 million by 20.
“Japan Earthquake—Tsunami Fun Facts,” CNN Library, September 20, 2013. (http://www.cnn.com/2013/07/17/world/
asia/japan-earthquake—tsunami-fast-facts/index.html)
5
Yiyu Liu, “Sunny Days Ahead for Japan’s Solar Market,” China Daily, July 2, 2012. (http://www.chinadaily.com.cn/
world/2012-07/02/content_15540864.htm)
4
TB0357
3
This document is authorized for use only by Michael Kyle in MBA 623 Summer II taught by Caitlin Forehand, Walsh University from Jun 2024 to Aug 2024.
For the exclusive use of M. Kyle, 2024.
Mr. Suzuki’s Valuation
Mr. Suzuki did not agree with the way Mr. Yoshida estimated the firm value. After inheriting a sizable estate from
his father 15 years ago, Mr. Suzuki had been working with a financial advisor and had gained some financial
knowledge. He argued that cash flows in the future are not worth as much as cash flows today, so they have to
be discounted. If future cash flows were to stay constant for the next 20 years as Mr. Yoshida suggested, the firm
would be worth much less than ¥5 billion after those cash flows are discounted. However, he did not think cash
flows of the firm would stay constant. He was confident that the new feed-in tariff passed recently would increase
the demand for solar panels, and that would increase the firm’s net cash flows. He believed net cash flows should
increase by 3-5% per year over the next 20 years. He just needed to make that calculation after he determined
what to use as a discount rate.
Mr. Saito’s Valuation
Mr. Saito was glad that Mr. Suzuki understood the discounted cash flow concept and its importance in valuation.
He agreed that the firm would get some much-needed sales boosts in the coming years due to the new feed-in
tariff that started in July. As the majority owner who oversaw the day-to-day operation of Saito Solar, he had
witnessed an increase in sales orders since the new tariff was passed. Unlike Mr. Suzuki, he didn’t think the sales
growth would be steady over the 20-year period. He believed sales growth would be quite substantial in the first
few years when consumers and businesses responded to the change in the new tariff, but it would taper off. He
also didn’t believe that the firm would stop producing cash flows after 20 years. He argued that the company
would be in good hands, and hence should exist for the indefinite future. He explained that most companies’
discounted cash flow valuations were based on firms producing perpetual cash flows, as there was no reason for
a firm’s cash flows to disappear after a certain period.
In fact, Mr. Saito came to the meeting well prepared. Before the meeting, he asked his finance manager,
Ms. Yamada, to prepare the 5-year cash flow projections shown in Exhibit 3, with the details presented in Appendix 3. The projection had an aggressive sales growth in the near future, with growth slowing in later years.
Ms. Yamada, who had since joined the meeting, also suggested that cash flows beyond the 5-year period should
be growing at a constant rate of 1-3%. After some clarifications and discussions, the partners were convinced
that the projections in Exhibit 3 were reasonable.
Exhibit 3. Saito Solar’s Actual and Projected Sales and Free Cash Flows
4
TB0357
This document is authorized for use only by Michael Kyle in MBA 623 Summer II taught by Caitlin Forehand, Walsh University from Jun 2024 to Aug 2024.
For the exclusive use of M. Kyle, 2024.
Next, Ms. Yamada needed to determine the discount rate, which is the cost of capital for the firm. Since
Saito Solar had no debt, the discount rate would be what the owners expected to earn in this business. When
the three partners started the business in 2002, they determined that to properly account for the risks inherent
in this business, they expected to earn a minimum of 10% return on their equity capital. Ms. Yamada verified
and confirmed that the partners had not changed their expectations over the years. With this last piece of information and some sensitivity analyses, Ms. Yamada was able to project a range of firm values for the partners.
TB0357
5
This document is authorized for use only by Michael Kyle in MBA 623 Summer II taught by Caitlin Forehand, Walsh University from Jun 2024 to Aug 2024.
For the exclusive use of M. Kyle, 2024.
Appendix 1. Saito Solar, Profit and Loss Statement
(millions of Yen, year ending June 30)
Income Item
Sales
COGS
Gross margin
Gross margin (%)
2009
6,833.2
4,323.7
2,509.5
36.7%
2010
6,755.7
4,298.1
2,457.6
36.4%
2011
6,345.1
4,112.0
2,233.1
35.2%
2012
6,234.1
4,041.9
2,192.2
35.2%
Marketing & selling
G&A expenses
EBITDA
EBITDA margin (%)
1210.8
586.2
712.5
10.4%
1,199.6
570.7
687.3
10.2%
1,083.1
560.6
589.4
9.3%
1,030.2
569.0
593.0
9.5%
Depreciation
EBT
EBT margin (%)
150.4
562.1
8.2%
167.2
520.1
7.7%
140.3
449.1
7.1%
156.4
436.6
7.0%
Taxes
Net Income
Return on sales (%)
222.0
340.1
5.0%
205.4
314.7
4.7%
177.4
271.7
4.3%
172.5
264.1
4.2%
Dividends
Retained earnings
150.0
190.1
150.0
164.7
150.0
121.7
150.0
114.1
Appendix 2. Saito Solar, Balance Sheets
(millions of Yen, as of June 30)
6
Assets
Cash
Accounts Receivable
Inventory
Prepaid Expenses
Current Assets
2009
120.3
1,828.0
1,127.7
97.6
3,173.6
2010
83.3
1,895.7
1,100.8
90.1
3,169.9
2011
40.6
2,045.0
1,010.2
89.2
3,185.0
2012
140.7
2,121.3
1,065.0
95.8
3,422.8
Net Fixed Assets
2,210.1
2,250.2
2,246.6
2,090.2
Total Assets
5,383.7
5,420.1
5,431.6
5,513.0
Liabilities & Net Worth
Accounts Payable
Accrued Expenses
Current Liabilities
2009
1,270.6
143.0
1,413.6
2010
1,098.2
187.1
1,285.3
2011
1,001.1
174.0
1,175.1
2012
999.2
143.2
1,142.4
Equity
3,970.1
4,134.8
4,256.5
4,370.6
Liabilities & Net Worth
5,383.7
5,420.1
5,431.6
5,513.0
TB0357
This document is authorized for use only by Michael Kyle in MBA 623 Summer II taught by Caitlin Forehand, Walsh University from Jun 2024 to Aug 2024.
For the exclusive use of M. Kyle, 2024.
Appendix 3. Saito Solar, Projected Profit & Loss and Cash Flows
(millions of Yen, year ending June 30)
Income Item
Sales
COGS
Gross margin
Gross margin (%)
Actual
2012
6,234.1
4,041.9
2,192.2
35.2%
2013
7,792.6
4,994.8
2,797.8
35.9%
2014
9,351.2
5,993.8
3,357.4
35.9%
Projected
2015
2016
10,753.8 11,829.2
6,892.8
7,582.1
3,861.0
4,247.1
35.9%
35.9%
2017
12,420.7
7,961.2
4,459.5
35.9%
Marketing & selling
G&A expenses
EBITDA
EBITDA margin (%)
1,030.2
569.0
593.0
9.5%
1,202.0
660.2
935.6
12.0%
1,344.2
960.0
1,053.2
11.3%
1,504.4
1,134.2
1,222.4
11.4%
1,722.9
1,180.2
1,344.0
11.4%
1,875.0
1,200.0
1,384.5
11.1%
Depreciation
EBT
EBT margin (%)
156.4
436.6
7.0%
174.4
761.2
9.8%
190.0
863.2
9.2%
200.0
1,022.4
9.5%
220.5
1,123.5
9.5%
250.0
1,134.5
9.1%
Taxes
Net Income (NI)
Return on sales (%)
172.5
264.1
4.2%
289.3
472.0
6.1%
328.0
535.2
5.7%
388.5
633.9
5.9%
426.9
696.6
5.9%
431.1
703.4
5.7%
Operating Cash Flows
(NI + Depreciation)
420.5
646.4
725.2
833.9
917.1
953.4
Change in NWC
(170.4)
(200.0)
(210.0)
(245.0)
(260.0)
(275.0)
Change in CAPEX
0
(50.0)
(50.0)
(50.0)
(50.0)
(50.0)
250.1
396.4
465.2
538.9
607.1
628.4
Free Cash Flow
TB0357
7
This document is authorized for use only by Michael Kyle in MBA 623 Summer II taught by Caitlin Forehand, Walsh University from Jun 2024 to Aug 2024.
For the exclusive use of M. Kyle, 2024.
Appendix 4. Discounting Future Cash Flows with Formulas
A firm’s free cash flows can be in a variety of patterns, ranging from a simple single future cash flow to a complex
mixed stream of projected cash flows. Most, if not all, can be handled by one of the formulas below.
Generic DCF Formula
• PV = the present value of the cash flow stream
• CFt = the cash flow which occurs at the end of year t
• r = the discount rate (assumed to be constant over the project horizon)1
• t = the year, which ranges from one to n
• n = the last year in which a cash flow occurs
• Σ denotes summation of the cash flows as t goes from 1 to n
Note that discount rate, opportunity rate, required rate of return, interest rate, capitalization rate, and weighted average
cost of capital (WACC) are terms used interchangeably by authors and practitioners.
1
Fortunately, simpler versions (shortcuts) of the above formula exist, including:
No Growth Perpetuity
where CF∞ is the constant perpetual cash flow and r = the discount rate.
Growing Perpetuity
where CF1 is the cash flow at the end of year one, r = the discount rate, and g = the growth rate.
Regular Annuity
where CF represents the steady end-of-year cash flow, r = the discount rate, and T = the number of constant cash
flows. The term in brackets is defined as an annuity factor, and facilitates more tedious algebraic computation.
Growing Annuity
where r = the discount rate, g = the growth rate, and T = the number of cash flows. Note that the formula above is
simply the PV of a growing perpetuity “penalized” by cash flows foregone.
In all of these cases, cash flows are assumed to occur at the end of the year, and the formulas throughout represent
discrete (vs. continuous) time versions of these cash flows.
8
TB0357
This document is authorized for use only by Michael Kyle in MBA 623 Summer II taught by Caitlin Forehand, Walsh University from Jun 2024 to Aug 2024.
Writing Rubric
Criterion
Not Acceptable
Needs
Improvement
Satisfactory
Exemplary
The paper is
weak in
organization
and/or
coherence. The
reader cannot
identify a line of
reasoning.
Frequent lapses
in tone and voice.
The writing does
not engage the
reader.
The paper is
generally
organized and
coherent. The
reader can mostly
follow the line of
reasoning.
The paper is well
organized and
coherent
throughout. The
reader can follow
the line of
reasoning.
Tone and voice
are generally
appropriate with
only minor
lapses.
Tone and voice
are professional
and consistently
appropriate
throughout.
Lacking in flow
of thoughts and
ideas.
Minimal flow of
thoughts and
ideas.
Flow of thoughts
and ideas is
generally
consistent.
Flow of thoughts
and ideas is
consistent
throughout.
Word choice is
confusing,
unclear and/or
inappropriate.
Word choice is
poor and/or
inappropriate.
Word choice is
generally clear,
concise and
appropriate.
Word choice is
accurate, clear,
concise and
appropriate
throughout.
Sentence
Structure
Sentences are
fragmented and
incomplete.
Several sentences
are constructed
incorrectly.
Most sentences
are well phrased,
clear and varied.
Sentences are
well phrased,
clear and varied
throughout.
Grammar &
Spelling
No attention
given to grammar
and spelling.
Errors are
frequent and
distracting.
Writing is error
free throughout.
No attention
given to
punctuation and
capitalization.
Errors are
frequent and
distracting.
No apparent
format.
Inappropriate
format and/or
frequent
inconsistency in
application.
Minor errors are
apparent but do
not detract from
or obscure
meaning.
Minor errors are
apparent but do
not detract from
or obscure
meaning.
Writing is error
free throughout.
Appropriate
format but with
minor
inconsistencies in
application.
Unorganized and
incoherent.
Organization
& Coherence
Professional
Tone/Voice
Presentation
of Ideas
Word Choice
Punctuation
&
Capitalization
Format
(Length,
Report,
Essay, APA)
Tone and voice
are inappropriate
throughout.
Writing is error
free throughout.
Appropriate
format
consistently
applied and
artifact within
assigned page
length.
Score*