Final DEF

DEF Road Construction
Private Business Valuation Challenge

Valuation Factors
Background
Economic Outlook
Industry Overview
Financial Analysis
Valuation Methods
Conclusion of Value
2

Disclaimers
Management is assumed to be competent
Forecasts and expectations are assumed to be accurate
Projects and Forecasts on non-management given data
All projected figures denoted with *
4 – Period Moving Average – Lowest MSE
All Valuation Spreadsheet numbers in Thousands
besides Final Enterprise Value Given
3

Background
Bear family beginnings
Purchase of sand & gravel and ready-mix concrete company in
Washington
Expansion through Pacific Northwest
Various paving businesses
Dump truck business
Consolidated holdings into
DEF Road Construction Corp.
4

Product
Sales, 30%Contracting
Service,
70%
Offers construction contracting
services
Asphalt paving
Product sales
Asphalt
Gravel
Sand
4 primary rock pits
30% of rock sales and
production
Services & Products
Source: Moss-Adams, LLP5

Product
Sales, 30%Contracting
Service,
70%
Offers construction contracting
services
Asphalt paving
Product sales
Asphalt
Gravel
Sand
4 primary rock pits
30% of rock sales and
production
Services & Products

Revenue by Customer Segment
60%
85%
40%
15%
0%
25%
50%
75%
100%
125%
Pre-2008 2008-2013
Private
Public

GDP Growth Rate (Average)
-2.8%
2.5%
1.6%
2.3% 2.2%
2.7%
3.3% 3.4%
3.0%
2.5%
-3.0%
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
4.0%
2009
2010
2011
2012
2013
2014*
2015*
2016*
2017*
2018*
Source: CBO.gov9

4.11%
4.03%
3.62%
2.54%
3.12%
3.48%
3.36%
3.22%
3.15%
3.27%
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
4.0%
4.5% 2009
2010
2011
2012
2013
2014*
2015*
2016*
2017*
2018*
20-Year T-Bill Rate
Source: US Treasury10

5.8%
9.4% 9.6% 9.0% 8.0% 7.4% 6.2% 5.4% 5.0% 4.9%
19.5%
20.6%
16.4%
13.8%
11.3%
13.8%
13.0%
12.7%
13.2%
13.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2009
2010
2011
2012
2013
2014*
2015*
2016*
2017*
2018*
Unemployment Rate Construction Industry
Average Unemployment Rate
Source: BLS.gov11

Change in PPI—Asphalt
-1.8
1.3
6.4
1.0
-1.0
2.1
0.7
0.6
1.2
0.8
-4.0
-2.0
-
2.0
4.0
6.0
8.0 2009
2010
2011
2012
2013
2014*
2015*
2016*
2017*
2018*
12

Economic Summary
Stable Economy
Consistent GDP Growth
Low Inflation Rates
Strong Growth Projections
Decreasing PPI
Decreasing Unemployment Rate
13

Industry Overview
SIC (Standard Industrial Classification): 1611
NAICS (North American Industry Classification System): 237310
The US highway and street construction industry includes 17,900 firms
Combined annual revenue of $69.56 Billion
The biggest challenges include
Volatile raw materials costs
Pressure on government agencies
Source: BLS.gov, Census.gov15

American Society of Civil Engineers rates road infrastructure:
D (POOR: AT RISK)
42% of America’s major urban highways remain congested
Costs the economy an estimated $101 Billion annually
Level of investment is insufficient investment & still projected to result
in a decline in conditions and performance in the long term
Industry Overview
Source: BLS.gov16

Projected slow growth in the five years to 2018
local and state governments continue to struggle with their
budgets
federal spending remains uncertain
Major U.S. companies in this industry are AECOM, Bechtel, Kiewit, and
Granite Construction
In 2013, the trust fund disbursed $50 Billion to states according to
Congressional Budget Office (CBO)
$43 Billion for roads
$7 billion for mass transit
Industry Overview
Sources: BLS.gov & CBO.gov17

The Highway Trust Fund
Established by the Highway Revenue Act of 1956
Used to finance an accelerated highway program
Relies on a fuel tax of 18.4 cents per gallon (set in 1993)
In the past 10 years, outlays have exceeded revenues
Source: CBO.gov18

11.3
9.51
12.11
16.53
22.55
16.13
10.8
9.01
10.03
20.74
9.73
3.77
0
10
20
30
40
50 1993
1995
1997
1999
2001
2003
2005
2006
2008
2010
2012
Income Outlays Balance
Status of the Federal Highway Trust Fund 1993-2013
BillionsofDollars$
Source: Federal Highway Administration19

Industry Profit Margins
20132006
6%
2%
21%
16%
Source: Sageworks20

Significant Bill: MAP-21
MAP-21 (Moving Ahead for Progress in the 21st Century Act)
P.L. 112-141 signed into law in July 2012
Provides funding for surface transportation programs at over
$105 billion for fiscal years (FY) 2013 and 2014
Public Private Partnerships as an important component
Source: CBO.gov21

The National Highway Construction Cost Index
(NHCCI)
Source: Federal Highway Administration
1.28
1.04 1.05
1.09
1.11
1.08
1.11
1.08 1.09 1.09
1.0
1.1
1.1
1.2
1.2
1.3
1.3
2009
2010
2011
2012
2013
2014*
2015*
2016*
2017*
2018*
22

85%
Of revenues come from
Washington State
Source: TRIP Research23

Washington State
Washington roadways in poor condition cost residents
approximately $6.5 billion
Average Seattle driver loses $1,845/year as a result
21% of Washington’s roads, highways in poor condition
At least $175 Billion to $200 Billion in funding is required to meet
statewide needs over the next 20 years
Source: TRIP Research24

2013 to 2018 share of state maintained roads in poor
condition more than triple from 8% to 26%
Share of state-maintained roads and highways in good
condition will decrease from 70% to 45%
Source: TRIP Research
Washington State
25

Hot Mix Asphalt Prices - Washington
Source: Washington Department of Transportation
$67.4
$63.4
$66.2
$80.2
$71.3
$69.7
$70.2
$71.5
$72.6
$71.0
$60.0
$65.0
$70.0
$75.0
$80.0
$85.0
2009
2010
2011
2012
2013
2014*
2015*
2016*
2017*
2018*
26

WSDOT Highway Construction Cost Index
Hot Mix Asphalt Prices – Washington State
Source: Washington Department of Transportation
223
232
245
258
243 240 244 246 246 244
$67.4
$63.4
$66.2
$80.2
$71.3
$69.7
$70.2
$71.5
$72.6
$71.1
$-
$20.0
$40.0
$60.0
$80.0
$100.0
200
210
220
230
240
250
260
270
2009
2010
2011
2012
2013
2014*
2015*
2016*
2017*
2018*
27

28
Government Highway Spending 2008-2018
Source: IBISworld Research
$223.6
$223.7
$220.3
$221.8
$225.1
$229.9
$236.1
$244.1
$250.2
$256.0
$200.0
$210.0
$220.0
$230.0
$240.0
$250.0
$260.0
2009
2010
2011
2012
2013
2014*
2015*
2016*
2017*
2018*

$71.83
$71.25
$70.68
$70.12
$69.56
$79.30
$90.40
$103.06
$117.48
$133.93
$0
$20
$40
$60
$80
$100
$120
$140
$160
2009
2010
2011
2012
2013
2014*
2015*
2016*
2017*
2018*
29
US Road & Highway Construction Revenue 2009-2018
Source: IBISworld Research

Industry Summary
Major source of funding: Highway Trust Fund - running out of capital
MAP-21 – Recovering Funding
Demand for new road and highway infrastructure is growing significantly
Washington State offers positive environment for Road and Highway
Construction Industry
30

DEF Historical Revenues
$170,088
$153,602
$162,077
$169,911
$167,844
$145,000
$150,000
$155,000
$160,000
$165,000
$170,000
$175,000
2009 2010 2011 2012 2013
Sales ($000)
Source: DEF Road Construction Corp. Exhibit 532

Projected Sales Growth
$167,500*
$176,545*
$185,902*
$194,268*
$202,622*
$140,000
$150,000
$160,000
$170,000
$180,000
$190,000
$200,000
$210,000
2009
2010
2011
2012
2013
*2014
*2015
*2016
*2017
*2018
Sales ($000)
*projected

Operating Income
$13,005
$6,901
$8,418
$3,872
$8,979
$-
$2,000
$4,000
$6,000
$8,000
$10,000
$12,000
$14,000
2009
2010
2011
2012
2013
In 2012, Operating Income was 1.4% of revenue
2013: Operating Income was 4% of revenue

Sources of Revenue
74%
71%
69%
68%
65%
26%
29%
32%
32%
35%
0%
10%
20%
30%
40%
50%
60%
70%
80%
2009
2010
2011
2012
2013
Construction Services
Product Sales

17.0%
14.7%
13.8%
11.3%
14.5%
7.6%
4.5%
5.2%
2.3%
5.3%
6.8%
4.1%
4.9%
1.7%
5.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
2009
2010
2011
2012
2013
Gross Profit
Operating Profit
Pretax Profit
Profit Margins
36

Profit Margins
4.4%
2.7%
3.2%
1.1%
3.2%
3.3%
2.7%
3.1%
3.3%
3.5%
17.0%
14.7%
13.8%
11.3%
14.5%
13.7%
13.7%
13.7%
13.7%
13.7%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
2009
2010
2011
2012
2013
2014*
2015*
2016*
2017*
2018*
Net Profit
Gross Profit

Profit Margins
14.5%
5.3%
5.0%
11.5%
2.4%
2.7%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
Gross Profit Operating Profit Pretax Profit
DEF
Industry

Liquidity Ratios
1.7
1.8
1.7
1.6
1.6
1.2
1.2
1.3
1.1
1.3
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
2.0
2009
2010
2011
2012
2013
Current Ratio
Quick Ratio

1.3
2.5
1.6
1.3
0.0
0.5
1.0
1.5
2.0
2.5
3.0
DEF Industry
Quick Ratio
Current Ratio
Liquidity

DuPont Analysis
DEF Industry
Sales/Assets 1.6 2.0
* EBIT Margin: 5.1% 2.7%
= Debt-Free ROA 8.0% 5.4%
* Pretax to EBIT 0.98 0.81
= Pretax ROA: 7.9% 4.4%
*Assets/Equity 1.66 2.36
= Pretax ROE 13.1% 10.4%

Solvency
DEF Industry
Debt to Worth 0.55 1.2
Long-Term Debt to Total
Capital
12.3% 27.3%
Interest Coverage 47.9 5.3
Cash Flow to Current Debt 1.3 2.2

Summary
Strong financial growth
High ability to cover obligations
Increase in operating profit and pretax profit
illustrates effective management and cost
control
Opportunity to better utilize their assets
43

Valuation Methods
Discounted Cash Flows
Market – Comparable Companies
Market – Mergers and Acquisitions
45

Discounted Cash Flows (Components)
Cost of Equity Calculation – Ke
Weight Average Cost of Capital – WACC
Capitalization Rate – C
Calculation of Total Enterprise Value
Enterprise Value After Discounting
46

Cost of Equity – Ke
Ke = Rf + (Bl x Re) + Rs + Rc
Ke = 3.54% + (1.21 x 5.00%) + 6.60% + 0.00%
Ke = 16.20%
47

Ke – Analysis
Rf – US Treasury Bill 20Y as of 11/30/2013 – 3.54%
Bl* – Calculated by unlevering the beta of SIC 16 and re-
levering using our companies financial data
= 0.99 x (1 + ((1-34.80%) x (34.38)) = 1.21
Re – Duff & Phelps Equity Risk Premium – 5.00%
Rs – Duff & Phelps Small Company Risk Premium – 6.60%
Rc – No company specific risk premium – 0.00%
*= Bloomberg Terminal Equity Screen48

Rc- 0.00%
Influencing Factors
Competition
Profitability
Efficiency
Solvency
49

Weighted Average Cost of Capital – WACC
WACC = (D/V x Kd x (1-T)) + (E/V x Ke)
WACC = (25.59% x 1.80% x (1-34.80%)) + (74.41% x 16.20%)
WACC = 12.36%
50

WACC – Analysis
D/V* – SIC 16 5-Year average – 25.59%
Kd – DEF actual cost of debt, 2-Year average – 1.80%
T – DEF Tax Rate from financials – 34.80%
E/V* – SIC 16 5-Year average – 74.41%
Ke – Previously calculated – 16.20%
51 *= Bloomberg Terminal Equity Screen

Capitalization Rate
C = WACC – G
C = 12.36% - 3.00%
C = 9.36%
G – Managements expectations of sales growth into
perpetuity
52

DEF ROAD CONSTRUCTION CORP.
Income approach - Discounted Cash Flows Analysis - ($000)
Projected Projected Projected Projected Projected
Forecast Year Ending Nov. 30 2014 2015 2016 2017 2018 Residual
Free Cash Flow (Debt Free) $ 11,395 $ 4,820 $ 5,246 $ 5,869 $6,261 $ 6,976
Residual Capitalization Rate 9.36%
Future Value of Free Cash Flows $11,395 $4,820 $5,246 $5,869 $6,261 $74,530
Number of Periods Deferred 0 1 2 3 4 4
Present Value Factor 1.00 0.89 0.79 0.71 0.63 0.63
Present Value of Free Cash
Flows $11,395 $4,290 $4,156 $4,138 $3,929 $46,769

Discounted Cash Flow Summary
Present Value of FY 2013-2018 Free Cash Flows $27,907
Present Value of Residual $46,769
Indicated Total Enterprise Value $74,676
Less: Distributions Payable $(6,942)
Less: Environmental Liability $(2,000)
Less: Interest Bearing Debt $(9,475)
Add: Non-Operating Assets (Majority Interest) $12,286
Add: Cash $25,475
Indicated Total Equity Value $94,020
Minority Discount @ 20% 0.8
Indicated Total Equity Value (Minority Interest) $68,518
Non-Marketability Discount @ 25% 0.75
Concluded Value - Income Approach Method $56,412

Discount Explanation
Minority Discount
Benchmark – 27.4%
DEF – Smaller than benchmark size, financial
buyer assumed
Discount For Lack of Marketability –
FMV Calculator and Studies flawed*
LiquiStat Study (2001)* - Range 25%-35%
Subject company smaller – Conservative 25% used
55 * IRS DLOM Job Aid, pg. 87

Market Approach – Comparable Companies
Comparable Companies Selected:
Entire Bloomberg SIC 16 data used
US Companies only, removed outliers in every data set to
make comparisons more valid
While business specifics may differ, these companies are
subject to the same economic cycles, political influences,
and other factors which may affect future business
56

Comparable Companies
Multiples Used
Revenues
EBITDA
EBIT
Last Twelve Months and Next Fiscal Year
57

LTM
Representative
Level
Selected Multiple Range
Indicated Enterprise
Value Range
Revenues $167,844 0.49 to 1.83 $82,244 to $307,155
EBITDA $14,589 6.03 to 9.15 $87,972 to $133,489
EBIT $8,534 10.2 to 16.61 $87,047 to $141,750
NFY
Revenues $167,500 0.52 to 2.45 $87,100 to $410,375
EBITDA $13,079 6.96 to 9.73 $91,030 to $127,259
EBIT $6,904 8.89 to 16.43 $61,377 to $113,433

Selected Enterprise Value Range , $91,030
Less: Total Interest Bearing Debt $(9,475)
Add: Non Operating Assets $12,286
Add: Cash $25,475
Indicated Equity Value $100,167
Minority Discount @20% 0.8
Discount for Lack of Marketability @25% 0.75
Concluded Value – Market Approach $66,224

Market Approach – Mergers and Acquisitions
Multiples Used
Revenues
EBITDA
60% weight given to 2013 transactions
40% weight given to 2009 transactions
60

Mergers & Acquisitions
($000)
Representative
Level
Selected Multiple
Range
Indicated Enterprise
Value Range
LTM
Revenues $167,844 0.35 to 1.30 $58,745 to $218,197
EBITDA $14,589 2.00 to 7.90 $29,178 to $115,253
Selected Enterprise Value Range $29,178 to $115,253
Weight 40% 60%
Selected Enterprise Value $80,823

Mergers and Acquisitions
Selected Enterprise Value Range $80,823
Less: Total Interest Bearing Debt $(9,475)
Add: Non Operating Assets $12,286
Add: Cash $25,475
Indicated Equity Value $100,167
Minority Discount @20% 0.8
Discount for Lack of Marketability @25% 0.75
Concluded Value—M&A Approach $60,100

Conclusion of Value
Income Approach Value Weight
Discounted Cash Flow $56,412,000 80%
Market Approach
Mergers and Acquisitions $60,100,000 10%
Comparable Companies $66,224,000 10%
Concluded Value of DEF $57,762,000
Number of Shares 60,000 Shares
Price Per Individual Share $962.70

Conclusion of Value
We find the total value per share of DEF Road
Construction Company to be $962.70 with an
Enterprise Value at $57,762,000.00
In our valuation, we have our weight distribution based
on the pertinence of our own companies projections
and less emphasis on the market data
64

Final DEF

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Editor's Notes