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1. Scenario
Present Value
Contract is renewed
A) With liabilities
$962,622
B) Without liabilities
$1,197,234
Contract is NOT renewed
A) With liabilities
$239,249
B) Without liabilities
$480,305
Market Value

2. Free Cash Flow Valuation -- Professional Services Firm
(Modifying variables in red will dynamically update the MV of the company)
Forecasting Variables:
2013
2014
2015
2016
2017
2018
2019
2020
2021
Revenue growth factor
35%
35%
35%
30%
30%
30%
20%
20%
20%
Expected gross profit margin
18%
19%
20%
20%
21%
22%
22%
23%
24%
S, G, & A expense % of revenue
20%
21%
21%
22%
23%
24%
25%
25%
26%
Depr. & Amort. % of revenue
4%
4%
4%
4%
5%
5%
5%
5%
5%
2013
2014
2015
2016
2017
2018
2019
2020
2021
($16,989)
($838)
Income tax rate
Assumed long-term sustainable growth rate
Discount rate
35%
4.72% per year after 2022
11.22%
Valuation Model Outputs:
Free cash flow
Terminal value
PV of Company Operations ($ mil)
Add: Total Assets
Less: Total Liabilities
Market Value of Company Assets ($ mil)
$848
$25,961
$4,963
$29,035
$37,745
($20,131)
$54,353
$1,077,589
$126,089.0
$241,056.0
$962,622
Note 1: Long Term Growth Rate
The long term GDP growth rate from 1947-2010 was 3.23%. Using the industry Beta of 1.46 as a proxy for sustainable growth rate above the average growth rate of the
economy, the long term growth rate assumption is 4.72%. Note that infinite growth above trend GDP is only reasonable because higher betas imply
greater risk of insolvency. If the company survives, a long term growth rate above average GDP is reasonable.
Data obtained from:
http://www.tradingeconomics.com/united-states/gdp-growth
Note 2: Total Liabilities
I used total liabilities because they represent the obligations of the company, unless discharged in the merger. If you want to use long term liabilities, use $131,096 in cell C22

3. 2022
20%
25%
26%
5%
2022
$65,224
$2,943,431

4. The Discounted Free Cash Flow Model for A Professional Services Firm
Actual
2012
Total revenue
Cost of Goods Sold
Years Ending December 31
|------------------------------------------------------------------------------------------ Forecast ----------------------------------------------------------------------------------------|
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
$1,551,738
$2,094,846
$2,828,043
$3,817,857
$4,963,215
$6,452,179
$8,387,833
$10,065,399
$12,078,479
$14,494,175
$17,393,010
1,270,527
1,717,774
2,290,714
3,054,286
3,970,572
5,097,221
6,542,509
7,851,011
9,300,429
11,015,573
13,044,757
Gross profit
281,211
377,072
537,328
763,571
992,643
1,354,958
1,845,323
2,214,388
2,778,050
3,478,602
4,348,252
Selling, general and administrative expenses
312,474
418,969
593,889
801,750
1,091,907
1,484,001
2,013,080
2,516,350
3,019,620
3,768,485
4,522,183
Earnings before interest, taxes, depr. & amort. (EBITDA)
(31,263)
(41,897)
(56,561)
(38,179)
(99,264)
(129,044)
(167,757)
(301,962)
(241,570)
(289,883)
9,520
75,414
107,466
145,079
198,529
322,609
419,392
503,270
603,924
724,709
Earnings before Interest and taxes (EBIT)
Net taxable earnings
(40,783)
(40,783)
(117,311)
(117,311)
(164,026)
(164,026)
(183,257)
(183,257)
(297,793)
(297,793)
(451,653)
(451,653)
(587,148)
(587,148)
(805,232)
(805,232)
(845,494)
(845,494)
(1,014,592)
(1,014,592)
(1,043,581)
(1,043,581)
Federal and State Income Taxes
(14,274)
(41,059)
(57,409)
(64,140)
(104,228)
(158,078)
(205,502)
(281,831)
(295,923)
(355,107)
(365,253)
Net Operating Profit After-Tax (NOPAT)
(26,509)
(76,252)
(106,617)
(119,117)
(193,565)
(293,574)
(381,646)
(523,401)
(549,571)
(659,485)
(678,327)
9,520
75,414
Depreciation and amortization
Add back depreciation and amortization
Free Cash Flow
869,650
107,466
145,079
198,529
322,609
419,392
503,270
603,924
724,709
869,650
($838)
$848
$25,961
$4,963
$29,035
$37,745
($20,131)
$54,353
$65,224
$191,323
$2,943,431
$913,781
(753)
($16,989)
686
18,870
3,244
17,061
19,942
(9,563)
23,215
25,047
66,060
Terminal Value, 2023
Terminal Value, 2013
Present Value of Free Cash Flows @ 11.22%
Total Present Value of Company Operations
$1,077,589
Plus Current Assets $ 119,645
Total Market Value of Great Expectations' Assets
(173,930)
$1,197,234

5. Free Cash Flow Valuation -- Professional Services Firm
(Modifying variables in red will dynamically update the MV of the company)
Forecasting Variables:
2013
2014
2015
2016
2017
2018
2019
2020
2021
Revenue growth factor
35%
35%
35%
30%
30%
30%
20%
20%
20%
Expected gross profit margin
18%
19%
20%
20%
21%
22%
22%
23%
24%
S, G, & A expense % of revenue
20%
21%
21%
22%
23%
24%
25%
25%
26%
Depr. & Amort. % of revenue
4%
4%
4%
4%
5%
5%
5%
5%
5%
2014
2015
2016
2017
2018
2019
2020
2021
Income tax rate
Assumed long-term sustainable growth rate
Discount rate
35%
4.72% per year after 2022
11.22%
2013
Valuation Model Outputs:
Free cash flow
Terminal value
PV of Company Operations ($ mil)
Add: Total Assets
Less: Total Liabilities
Market Value of Company Assets ($ mil)
($275)
$279
$8,534
$1,631
$9,544
$12,407
($6,617)
$17,867
$21,440
$354,216
$126,089.0
$241,056.0
$239,249
Note 1: Long Term Growth Rate
The long term GDP growth rate from 1947-2010 was 3.23%. Using the industry Beta of 1.46 as a proxy for sustainable growth rate above the average growth rate of the
economy, the long term growth rate assumption is 4.72%. Note that infinite growth above trend GDP is only reasonable because higher betas imply
greater risk of insolvency. If the company survives, a long term growth rate above average GDP is reasonable.
Data obtained from:
http://www.tradingeconomics.com/united-states/gdp-growth
Note 2: Total Liabilities
I used total liabilities because they represent the obligations of the company, unless discharged in the merger. If you want to use long term liabilities, use $131,096 in cell C22

6. 2022
20%
25%
26%
5%
2022
$62,890
$967,538

7. The Discounted Free Cash Flow Model for Professional Services Firm
Actual
2012
Total revenue
$510,076
Cost of Goods Sold
1,270,527
Gross profit
Selling, general and administrative expenses
Earnings before interest, taxes, depr. & amort. (EBITDA)
Depreciation and amortization
Earnings before Interest and taxes (EBIT)
Net taxable earnings
Years Ending December 31
|------------------------------------------------------------------------------------------ Forecast ----------------------------------------------------------------------------------------|
2013
2014
2015
2016
2017
2018
2019
2020
2021
$688,603
$929,614
$1,254,978
$1,631,472
$2,120,913
$2,757,187
$3,308,625
$3,970,350
$4,764,419
564,654
752,987
1,003,983
1,305,177
1,675,521
2,150,606
2,580,727
3,057,169
3,620,959
(760,451)
123,948
176,627
250,996
326,294
445,392
606,581
727,897
913,180
1,143,461
312,474
137,721
195,219
263,545
358,924
487,810
661,725
827,156
992,587
1,238,749
(13,772)
(18,592)
(12,550)
(32,629)
(42,418)
(55,144)
(99,259)
(79,407)
(1,072,925)
9,520
(1,082,445)
(1,082,445)
(95,288)
24,790
35,325
47,689
65,259
106,046
137,859
165,431
198,517
238,221
(38,562)
(38,562)
(53,918)
(53,918)
(60,239)
(60,239)
(97,888)
(97,888)
(148,464)
(148,464)
(193,003)
(193,003)
(264,690)
(264,690)
(277,924)
(277,924)
(333,509)
(333,509)
Federal and State Income Taxes
(378,856)
(13,497)
(18,871)
(21,084)
(34,261)
(51,962)
(67,551)
(92,641)
(97,274)
(116,728)
Net Operating Profit After-Tax (NOPAT)
(703,590)
(25,065)
(35,046)
(39,155)
(63,627)
(96,502)
(125,452)
(172,048)
(180,651)
(216,781)
24,790
Add back depreciation and amortization
Free Cash Flow
9,520
35,325
47,689
65,259
106,046
137,859
165,431
198,517
238,221
($275)
$279
$8,534
$1,631
$9,544
$12,407
($6,617)
$17,867
$21,440
(248)
($694,069)
225
6,203
1,066
5,608
6,555
(3,143)
7,631
8,233
Terminal Value, 2023
Terminal Value, 2013
Present Value of Free Cash Flows @ 11.22%
Total Present Value of Company Operations
$354,216
Plus Total Assets $ 126,089
Total Market Value of Great Expectations' Assets
$480,305

8. ----------------------------------------------------|
2022
$5,717,303
4,287,978
1,429,326
1,486,499
(57,173)
285,865
(343,038)
(343,038)
(120,063)
(222,975)
285,865
$62,890
$967,538
$300,370
21,715

9. Professional Services Firm Discount Rate Determination
100 Year Average US 10-year Treasury Yield:
Average Equity Risk Premium
Industry Beta
Expected Return from CAPM
Discount Rate ( r )
4.90%
4.33%
1.46
11.22%
11.22%
Note 1: 100 Year Average Treasury Yield
100 year average 10-year US treasury rate of 4.90% was obtained from:
http://observationsandnotes.blogspot.com/2010/11/100-years-of-bond-interest-rate-history.html
Note 2: Average Equity Risk Premium
The annual compounded return on the US equity composite index for the 1928-2011 time period was 9.23%.
The annual compounded return from US Treasury rates was 4.90% for the same period. The difference (4.33%) is the equity risk premium for the composite stock market.
The annual compounded return data was obtained from:
http://aswathdamodaran.blogspot.com/2012/03/equity-risk-premiums-2012-edition.html
Note 3: Industry Beta
The industry I used to compare R.A.D. is the "Human Resources" sector.
Summary Statistics
Industry Name
Human Resources
# Firms
25
Unlevere
Avg. Beta D/E Ratio Tax Rate d Beta
1.38
10.80%
26.61%
1.28
Cash/Firm
Value
Unlevered Beta
corrected for
cash
12.49%
1.46
I chose the unlevered Beta corrected for cash due to R.A.D.'s low cash position. The average Beta (1.38) is very close, and either number would work.
Data obtained from:
http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/Betas.html
Note 4: Discount Rate Derived from CAPM
The Capital Asset Pricing Model (CAPM):
Expected Return ( r ) = Risk free rate + Beta(Equity Risk Premium)
r = 4.9 + 1.46(4.33)
r = 11.22%

10. Fixed assets:
Computer Equipment
Accumulated Depreciation (Computer Equipment)
Computer Software
Accumulated Depreciation (Software)
Furniture and Fixtures
Accumulated Depreciation (FF&E)
Motor Vehicles
Accumulated Depreciation (Motor Vehicles)
Total fixed assets
2012
8,860.00
(7,990.00)
1,686.00
(1,685.00)
12,556.00
(12,360.00)
33,359.00
(27,982.00)
6,444.00
Depreciable Basis
$8,860.00
Yearly Depreciation Expense
$1,772.00
$1,686.00
$12,556.00
$2,511.20
$33,360.00
Sum:
$337.20
$6,672.00
$56,462.00 Sum:
$9,520.40
Note 1:
Yearly depreciation and amortization expense calculated by assuming a 5 year useful life and straight line depreciation
Note 2:
Depreciation and amortization expense is added back to EBITDA to determine FCFF
Note 3:
The depreciable basis is calculated as the book value (cost) of the asset less the balance in the associated accumulated depreciation account
Note 4:
New investment in PP&E will use the same 5 year useful life and straight line depreciation method to add to EBITDA to come up with FCFF

12. Professional Services Firm
Revenue
Gross sales
Less sales returns and allowances
Net sales
Cost of Sales
Salaries
Payroll Taxes
Commissions
Health Insurance
Reference Checks
Total COGS
Gross profit (loss)
Operating Expenses
Income Statement
Year to Date
Amount
$1,558,779
(7,041)
1,551,738
Amount
$1,095,795
$127,206
$17,157
$30,009
$360
$1,270,527
$281,211
% of Sales
100%
Year to Date
% of Sales
71%
8%
1%
2%
0%
82%
18%
Year to Date
Amount
% of Sales
$2,049
$1,976
$645
$5,051
$68
$580
$1,397
$10
$595
$271
$45,583
$2,086
$3,598
$13,058
$35
$9,196
$12,489
$1,846
$2,165
$4,227
$34,555
$163,249
$500
$759
$4,032
$2,454
312,474
($31,263)
0%
0%
0%
0%
0%
0%
0%
0%
0%
0%
3%
0%
0%
1%
0%
1%
1%
0%
0%
0%
2%
11%
0%
0%
0%
0%
20%
Selling, General and Administrative (SG&A)
Advertising
Auto Expense
Bad Debt Expense
Bank Service Charges
Client Lunch
Computer Expense
Dues and Subscriptions
Employee Relations
Entertainment
Gifts
Insurance
Legal and Accounting
Office Expenses
Outside Services
Parking
Payroll Expenses
Payroll Taxes
Postage and Delivery
Printing and Reproduction
Profit Sharing
Rent
Salaries and wages
Suspense
Taxes -- Other
Telephone
Utilities
Total SG&A
Net income before taxes

13. Taxes on income
Net income after taxes
Extraordinary gain or loss
Income tax on extraordinary gain
Net Income (Loss)
$0
($31,263)
$0
$0
($31,263)

14. Professional Services Firm
Balance Sheet
Assets
Current assets:
Cash
Accounts Receivable
Allowance for Bad Debts
Officer's Loan Receivable
Deposits
Total current assets
2012
9,950.00
112,151.00
(10,000.00)
4,132.00
3,412.00
119,645.00
Fixed assets:
Computer Equipment
Accumulated Depreciation (Computer Equipment)
Computer Software
Accumulated Depreciation (Software)
Furniture and Fixtures
Accumulated Depreciation (FF&E)
Motor Vehicles
Accumulated Depreciation (Motor Vehicles)
Total fixed assets
2012
8,860.00
(7,990.00)
1,686.00
(1,685.00)
12,556.00
(12,360.00)
33,359.00
(27,982.00)
6,444.00
Total assets
126,089.00
Liabilities and owner's equity
Current liabilities:
Credit Cards
Cash Overdraft
401K Contributions Payable
Federal W/H and FICA Payable
MA W/H Payable
FUTA Payable
SUI & MA Health Payable
Child Support Payable
Total current liabilities
2012
24,236.00
3,500.00
(200.00)
65,293.00
530.00
200.00
16,215.00
186.00
109,960.00
Long-term liabilities:
Accrued State Income Taxes
Deferred Income Taxes
Reserve Credit -- Fleet
Fleet -- Loan Payable
Sovereign Credit Line
Total long-term liabilities
2012
Owner's equity:
2012
456.00
5,858.00
13,922.00
36,097.00
74,763.00
131,096.00

15. Common Stock
Retained Earnings
Net Income
Total owner's equity
Total liabilities and owner's equity
3,175.00
(53,404.00)
(64,738.00)
(114,967.00)
126,089.00

16. Line Item Growth Factors and Assumptions
Revenue Growth Factor:
Comparable competitor, On Assignment (ASGN), five year TTM revenues:
12 months 12 months 12 months
ending 2011- ending 2010- ending 200912-31
12-31
12-31
Revenues
($MM)
597.28
438.06
416.61
Average
Annual
Compound
Growth Rate
20%
Gross Profit Growth Factor:
Current growth profit percentage is 18%, assume will gradually increase to ASGN's gross profit percentage to 25% (ASGN at 34% for reference)
25%
Selling, General and Administrative as a Percent of Revenues Growth Factor:
Current SG&A expense as a percent of revenues is 20%
Assume gradually increase to ASGN's SG&A percent of revenues of 25% (ASGN at 26% for reference)
26%
Depreciation and Amortization as a Percent of Revenues Growth Factor
Current SG&A expense as a percent of revenues is 3.6%
Assume gradually increase to ASGN's SG&A expense percent of revenus of 5%
5%