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Exhibit 1 - Recent Transactions in the Information Technology Services Industry
Source: Pratt's Stats

Sales MVIC to Net Income MVIC to Sales MVIC to Gross Profit

Under $1,000,000 0.16 0.71 1.02

$1,000,000-$5,000,000 0.11 1.35 1.92
$5,000,001-$20,000,000 -0.36 2.31 4.99
$20,000,001-$50,000,000 -0.06 0.64 1.78
$50,000,001-$100,000,000 0.02 1.12 6.78
Over $100,000,000 0.073 0.64 2.19
All Companies 0.008 1.24 2.41

* MVIC = Market Value of Invested Capital

ices Industry

MVIC to EBIT MVIC to Book Value

of Invested Capital
12.47 15.65
5.48 6.23
18.91 4.06
7.4 1.07
22.46 11.84
6.42 3.4
18.37 7.84
Exhibit 2 - ITE Financial Statement Information

Income Statement Information

2011 2012 2013
Total Revenue 1,358,013 2,185,370 2,789,920
Cost of Goods Sold 322,862 379,726 591,497
Direct Costs 226,525 439,816 685,430
Gross Profit 808,626 1,365,828 1,512,993
Indirect Costs 591,723 840,130 1,313,781
Operating Income 216,903 525,698 199,212
Other Expenses 54,606 62,220 137,779
Other Income 10,750 3,792 736
Net Income 173,047 467,270 62,169

Balance Sheet Information

2011 2012 2013
Assets
Current Assets 392,443 681,510 387,963
Computers/Furniture/Vehicles 91,502 137,613 151,604
Depreciation Comp/Furn/Vehicles (38,811) (59,020) (87,420)
Leashold Equipment - 2,575 14,690
Goodwill on Acquisitions 70,000 1,610,614 1,560,953
Other Assets 3,668 1,711 1,205
Total Assets 518,802 2,375,003 2,028,995

Liabilities
Current Liabilities 73,589 215,465 83,786
Bank Loans 20,604 542,349 517,705
Partner Loans - 14,651 114,569
Non-owner Notes - 183,729 684,140
Total Liabilities 94,193 956,195 1,400,201
Equity 424,610 1,418,809 628,794
Total Liabilities and Equity 518,802 2,375,003 2,028,995
Financial Market Information
Risk free rate 3.85%
Equity risk premium 6.00%
Small company risk premium 10.00%
Cost of high yield debt 12.00%

L.T. US Treasury Bond Yield (20 year) 3.00%

L.T. historical expected equity risk premium: Large

company stock total returns minus L. T. 6.50%
government bond income returns

L.T. supply side expected equity risk premium:

Historical equity risk premium minus price to 7.50%
equity ratio calculated using 3-year average returns
Source: Ibbotson and Associate, Stocks, Bonds,
Bills and Inflation 2009 Yearbook

Cost of Equity
Risk Free-Rate 3.00% Long Term average
Risk premium 7.50% Expected Rate
Unlevered Beta 0.75
ITE D/E (2013) 2.09
Tax Rate 31.74%
Levered Beta 1.82
Cost of Equity - ITE 11.20%
Pre-tax Cost of Debt 12.00%
Post Cost of Debt 8.19%

WACC 9.16%
Exhibit 5 - Competitors Data
Kratos Defense and Security Solutions
in millions 2007 2008 2009
Revenues 193.6 297.3 334.5
EBIT -26.9 -106.3 -37.3
Net Income -40.8 -111.1 -41.5
Price (December) 23.5 14 10.55
Number of Shares 7.42 10.53 15.78
Depreciation 4.3 7.3 8.3
Book Value Equity 167.2 146.9 124.9
Long Term Debt 74 76.9 51.6
Current Assets 106.9 116.2 98.8
Accounts Receivable 80.6 101.2 79.6
Current Liabilties 83.5 81.2 61.7
Net Fixed Assets 6.9 7.2 4.3
Dividend 0 0 0
Beta 1.18

Hackett Group
in millions 2007 2008 2009
Revenues 177.01 192.1 142.7
EBIT 9.27 18.34 -7.02
Net Income 9 17.88 -6.81
Price (December) 4.84 2.92 2.78
Number of shares 43.63 39.49 38.14
Depreciation 2.09 2.05 1.86
Book Value Equity 98.82 93.92 98.25
Long Term Debt 0 0 0
Current Assets 58.41 62.29 46.34
Accounts Receivable 29.74 25.48 28.65
Current Liabilties 33.02 37.99 34.91
Net Fixed Assets 5.71 5.77 7.14
Dividend 0 0 0
Beta 0.8

RCM Technologies
in millions 2007 2008 2009
Revenues 214.21 209.28 189.39
EBIT 11.05 -44.36 11.11
Net Income 6.77 -39.81 6.92
Price (December) 5.88 1.11 2.51
Number of Shares 12.06 12.77 12.96
Depreciation 1.45 2.06 1.62
Book Value Equity 92.05 55.35 63.3
Long Term Debt 0 0 0
Current Assets 61.21 66.18 60.68
Accounts Receivable 47.36 55.77 46.35
Current Liabilties 17.67 23.49 14.01
Net Fixed Assets 4.23 5.59 4.77
Dividend 0 0 0
Beta 0.5

Sword Group
in millions 2007 2008 2009
Revenues 263.54 289.98 258.84
EBIT 42.16 44.23 42.54
Net Income 27.84 30.08 31.58
Price (December) 50.93 13.88 35.13
Number of shares 9.29 9.29 9.29
Depreciation 2.86 3.43 2.81
Book Value Equity 218.07 175.13 212.26
Long Term Debt 0 0 0
Current Assets 164.61 165.81 197.6
Accounts Receivable 0 0 0
Current Liabilties 116.51 111.32 116.14
Net Fixed Assets 9.23 8.95 7.98
Dividend (per share) 0 0.75 0.86
Beta 0.68

*All values from Hoovers, unless otherwise noted

Beta from Thomson One Banker and Factiva
Depreciation from Google Finance
Competitors Kratos Hacket RCM
Beta 1.18 0.80 0.50
Mkt Cap ($ Million) 166.48 106.03 32.53
Debt Value 51.60 - -
D/E 0.31 - -
Tax Rate (zero if no profit) 0% 0.00% 37.71%

Industry Beta (levered) 0.79

Industry D/E 0.08
Industry Tax Rate 31.74% Average of profit making co has been chosen
Industry Beta (unlevered) 0.75
 Sword
0.68
326.36
-
-
25.76%

been chosen
Few Assumptions
Growth in sales assmued at 20% flat as stated in the problem and 2.4% in TY.
All items has been projected as % of sales and is based on past three years average
Other income assumed to be non core income has been ignored
Depreciation expenses in income statement is assumed to be included in indirect costs
Interest expenses has been assumed to be part of other expenses
For terminal year, all items has been assumed at same 2.4% growth
Goodwill on acquisitions has been assumed at constant level for lack of information
Total loan and surplus cash has been considered as a balancing figure depending upon surplus cash of deficit cash (shown as lo

Since value of interest expense not given in the problem, indirect method has been adopted to value ITE
First Value of Equity has been computed
Then current value of debt as on december 2013 has been added
Also since tax rate has not been mentioned in the problem, it is assumed at equivalent to average tax rate of profit making com

Year 2014 2015 2016 2017

Depreciation 473,054 112,095 134,514 161,417
Capex (518,010) (133,949) (160,733) (192,873)
Increase in Current Assets (95,684) (119,282) (148,701) (185,375)
Increase in Current liabilities 120,230 40,803 48,964 58,756
D/E 1.19 0.69 0.36 0.13

Year 1 2 3 4
Net income after tax 269,372 323,247 387,896 465,475
Add: Equity portion of depreciation 216,156 66,272 98,761 142,514
Less: Equity portion of capex (236,698) (79,192) (118,011) (170,286)
Less: Increase in equity portion of current Assets (43,722) (70,521) (109,177) (163,667)
Add: Increase in equity portion of current liabilities 54,938 24,123 35,949 51,876
Less: Debt repayment (248,961) (222,913) (261,940) (307,400)
Free Cash Flow to Equity 11,085 263,928 295,418 325,912
Discount Factor at Cost of Equity 0.8993 0.8087 0.7272 0.6540
PV of FCFE 9,968 213,434 214,835 213,136

Value of Equity 7,396,666

Add: Value of Debt 1,316,414
Value of Firm 8,713,080
ash of deficit cash (shown as loan)

ge tax rate of profit making competitors

2018 2019 2020 2021 2022 2023 TY

193,700 232,440 278,928 334,713 401,656 481,987 69,406
(231,441) (277,722) (333,260) (399,905) (479,880) (575,849) (83,307)
(231,095) (288,090) (359,142) (447,717) (558,138) (695,792) (84,407)
70,508 84,609 101,531 121,837 146,205 175,446 25,264
- - - - - - -

5 6 7 8 9 10 10
558,570 670,284 804,341 965,209 1,158,251 1,389,901 1,423,259
193,700 232,440 278,928 334,713 401,656 481,987 69,406
(231,441) (277,722) (333,260) (399,905) (479,880) (575,849) (83,307)
(231,095) (288,090) (359,142) (447,717) (558,138) (695,792) (84,407)
70,508 84,609 101,531 121,837 146,205 175,446 25,264
(275,200) - - - - - -
360,243 421,521 492,398 574,138 668,094 775,693 15,340,595
0.5881 0.5289 0.4756 0.4277 0.3846 0.3459 0.3459
211,856 222,923 234,175 245,543 256,944 268,275 5,305,577
Metrics in 2014 Net Income Sales Gross Profit EBIT (Operating Profit) Invested Capital
ITE 269,372 3,347,904 1,967,164 526,378 1,965,619
Ratios applied 0.11 1.35 1.92 5.48 6.23
Value of Firm 29,631 4,519,670 3,776,954 2,884,551 12,245,807
Average Value of Firm 4,691,323
Exhibit 2 - ITE Financial Statement Information

Income Statement Information 2011 2012 2013 2014 (P)

Total Revenue 1,358,013 2,185,370 2,789,920 3,347,904
% Growth 60.9% 27.7% 20.00%
Cost of Goods Sold 322,862 379,726 591,497 695,824
% of Sales 23.77% 17.38% 21.20% 20.78%
Direct Costs 226,525 439,816 685,430 684,916
% of Sales 16.68% 20.13% 24.57% 20.46%
Gross Profit 808,626 1,365,828 1,512,993 1,967,164
Gross margin 59.54% 62.50% 54.23% 58.76%
Indirect Costs 591,723 840,130 1,313,781 1,440,786
% of Sales 43.57% 38.44% 47.09% 43.04%
Operating Income 216,903 525,698 199,212 526,378
Operating margin 15.97% 24.06% 7.14% 15.72%
Other Expenses 54,606 62,220 137,779 131,758
% of Sales 4.02% 2.85% 4.94% 3.94%
Other Income 10,750 3,792 736 -
% of Sales 0.79% 0.17% 0.03%
Net Income before tax 173,047 467,270 62,169 394,620
Tax Rate
(Average of profit making companies from Ex4) 31.74% 31.74% 31.74% 31.74%
Net Income after tax 118,124 318,964 42,437 269,372

Balance Sheet Information 2011 2012 2013 2014 (P)

Assets
Current Assets 392,443 681,510 387,963 483,647
% of sales 28.90% 31.19% 13.91% 24.66%
Surplus Cash (Balancing Figure) -
Computers/Furniture/Vehicles 91,502 137,613 151,604 669,581
% of sales 6.74% 6.30% 5.43% 20.00%
Depreciation Comp/Furn/Vehicles (38,811) (59,020) (87,420) (560,474)
Net assets 52,691 78,592 64,184 109,107
% of sales 3.9% 3.6% 2.3% 3.3%
Leashold Equipment - 2,575 14,690 14,722
% of sales 0.00% 0.12% 0.53% 0.21%
Goodwill on Acquisitions 70,000 1,610,614 1,560,953 1,560,953
Other Assets 3,668 1,711 1,205 1,207
% of sales 0.27% 0.08% 0.04% 0.13%
Total Assets 518,802 2,375,003 2,028,995 2,169,635

Liabilities
Current Liabilities 73,589 215,465 83,786 204,015
% of Sales 5% 10% 3% 6%
Bank Loans 20,604 542,349 517,705
Partner Loans - 14,651 114,569
Non-owner Notes - 183,729 684,140
Total Loans (Balancing Figure) 20,604 740,729 1,316,414 1,067,453
Total Liabilities 94,193 956,195 1,400,201 1,271,468
Equity 424,610 1,418,809 628,794 898,166
Total Liabilities and Equity 518,802 2,375,003 2,028,995 2,169,635

Depreciation during the year (20,209) (28,400) (473,054)

 2015 (P) 2016 (P) 2017 (P) 2018 (P) 2019 (P) 2020 (P) 2021 (P)
4,017,485 4,820,982 5,785,178 6,942,214 8,330,656 9,996,788 11,996,145
20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00%
834,989 1,001,987 1,202,384 1,442,861 1,731,433 2,077,720 2,493,264
20.78% 20.78% 20.78% 20.78% 20.78% 20.78% 20.78%
821,899 986,279 1,183,535 1,420,242 1,704,291 2,045,149 2,454,179
20.46% 20.46% 20.46% 20.46% 20.46% 20.46% 20.46%
2,360,596 2,832,716 3,399,259 4,079,110 4,894,932 5,873,919 7,048,703
58.76% 58.76% 58.76% 58.76% 58.76% 58.76% 58.76%
1,728,943 2,074,731 2,489,678 2,987,613 3,585,136 4,302,163 5,162,595
43.04% 43.04% 43.04% 43.04% 43.04% 43.04% 43.04%
631,654 757,984 909,581 1,091,497 1,309,797 1,571,756 1,886,107
15.72% 15.72% 15.72% 15.72% 15.72% 15.72% 15.72%
158,109 189,731 227,677 273,213 327,856 393,427 472,112
3.94% 3.94% 3.94% 3.94% 3.94% 3.94% 3.94%
- - - - - - -

473,544 568,253 681,904 818,284 981,941 1,178,329 1,413,995

31.74% 31.74% 31.74% 31.74% 31.74% 31.74% 31.74%

323,247 387,896 465,475 558,570 670,284 804,341 965,209

2015 (P) 2016 (P) 2017 (P) 2018 (P) 2019 (P) 2020 (P) 2021 (P)

602,929 751,630 937,005 1,168,100 1,456,190 1,815,331 2,263,048

24.66% 24.66% 24.66% 24.66% 24.66% 24.66% 24.66%
- - - 85,042 506,564 998,962 1,573,100
803,497 964,196 1,157,036 1,388,443 1,666,131 1,999,358 2,399,229
20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00%
(672,569) (807,083) (968,499) (1,162,199) (1,394,639) (1,673,567) (2,008,280)
130,928 157,114 188,536 226,244 271,492 325,791 390,949
3.3% 3.3% 3.3% 3.3% 3.3% 3.3% 3.3%
14,753 14,785 14,817 14,848 14,880 14,912 14,944
0.21% 0.21% 0.21% 0.21% 0.21% 0.21% 0.21%
1,560,953 1,560,953 1,560,953 1,560,953 1,560,953 1,560,953 1,560,953
1,208 1,210 1,211 1,213 1,214 1,216 1,218
0.13% 0.13% 0.13% 0.13% 0.13% 0.13% 0.13%
2,310,771 2,485,691 2,702,523 3,056,400 3,811,294 4,717,166 5,804,212

244,819 293,782 352,539 423,047 507,656 609,187 731,024

6% 6% 6% 6% 6% 6% 6%
 844,540 582,600 275,200 - - - -
1,089,359 876,383 627,739 423,047 507,656 609,187 731,024
1,221,413 1,609,309 2,074,784 2,633,354 3,303,638 4,107,979 5,073,188
2,310,771 2,485,691 2,702,523 3,056,400 3,811,294 4,717,166 5,804,212

(112,095) (134,514) (161,417) (193,700) (232,440) (278,928) (334,713)

 2022 (P) 2023 (P) Terminal Yr
14,395,374 17,274,449 17,689,036
20.00% 20.00% 2.40%
2,991,917 3,590,300 3,676,467
20.78% 20.78% 20.78%
2,945,014 3,534,017 3,618,834
20.46% 20.46% 20.46%
8,458,443 10,150,132 10,393,735
58.76% 58.76% 58.76%
6,195,114 7,434,137 7,612,557
43.04% 43.04% 43.04%
2,263,329 2,715,995 2,781,179
15.72% 15.72% 15.72%
566,534 679,841 696,158
3.94% 3.94% 3.94%
- - -

1,696,794 2,036,153 2,085,021

31.74% 31.74% 31.74%

1,158,251 1,389,901 1,423,259

2022 (P) 2023 (P) Terminal Yr

2,821,186 3,516,978 3,601,386

24.66% 24.66% 20.36%
2,241,194 3,016,888 4,367,102
2,879,075 3,454,890 3,537,807
20.00% 20.00% 20.00%
(2,409,936) (2,891,923) (2,961,330)
469,139 562,966 576,478
3.3% 3.3% 3.3%
14,976 15,009 15,369
0.21% 0.21% 0.09%
1,560,953 1,560,953 1,560,953
1,219 1,221 1,250
0.13% 0.13% 0.01%
7,108,668 8,674,015 10,122,538

877,229 1,052,675 1,077,939

6% 6% 6%
 - - -
877,229 1,052,675 1,077,939
6,231,439 7,621,340 9,044,599
7,108,668 8,674,015 10,122,538

(401,656) (481,987) (69,406)