Advanced Investment Memo (IC Memo)

We need to write an internal investment committee memo for a long/short equity fund. The company is LedgerLift (LLLT). We have data and valuation assumptions. We need to produce a recommendation with price target range, business overview, KPI quality check, base/bull/bear DCF model, comps cross-check, catalysts, risks, "what would change my mind", and 10 diligence questions.

We must use only the information given; it's a fictional exercise.

We'll need to compute DCF for each scenario: base, bull, bear. We have revenue growth rates for 2026-2030 (5 years). We have gross margin and operating margin projections for those years. We need to compute EBIT (operating profit) and then unlevered free cash flow (UFCF). We have data on D&A (2.5% of revenue), capex (3.0% of revenue), net working capital investment (1.0% of incremental revenue). We have cash tax rate 23%. We also have net cash $1.4B, shares outstanding 190m, current share price $46.

We need to compute UFCF each year. Steps: Revenue each year. EBIT = operating margin * revenue. Then we need to compute taxes: taxes on EBIT at cash tax rate 23%? But careful: In UFCF we usually compute NOPAT = EBIT * (1 - tax rate). Then add back D&A, subtract capex, subtract change in NWC. D&A is given as % of revenue, capex % of revenue, NWC investment is 1% of incremental revenue (i.e., change in revenue). So we can compute.

Alternatively, we can compute UFCF = EBIT*(1-tax) + D&A - capex - change in NWC.

We have gross margin and operating margin, but we don't need gross margin for UFCF except maybe to check consistency. But we can use operating margin directly.

We need to forecast beyond 2030 to terminal value. Terminal growth given: base 3%, bull 4%, bear 2%. WACC: base 10%, bull 9%, bear 12%. Use perpetuity growth formula: Terminal Value = FCF_{terminal year} * (1+g) / (WACC - g). Usually we compute UFCF for year 2030, then compute TV as of end of 2030 (or as of beginning? We need to be consistent with discounting). Typically, we project UFCF for each year, and then at the end of the forecast period we compute terminal value, which represents the value of all future cash flows beyond that point. So we need UFCF for 2030, then TV = UFCF2030 * (1+g) / (WACC - g). Then discount all UFCFs and TV back to present (mid-year? Usually end-of-year). We'll assume end-of-year cash flows for simplicity.

We need to compute present value as of today (presumably end of 2025? The data gives FY2025 revenue etc. So we are at the end of FY2025? Actually we have FY2025 revenue $820m, gross margin 78%, operating margin 18%. The forecasts are for 2026-2030. So we are at the beginning of 2026? We need to decide the valuation date. Usually DCF values the company as of now (present). The cash flows for 2026 are one year away. So we discount 2026 UFCF back one year, etc. So we need to compute UFCF for 2026-2030, then TV at end of 2030 discounted back.

We also have net cash, so equity value = EV + net cash. Then per share = equity value / shares outstanding.

We need to compute for each scenario.

Also comps cross-check: Use median multiples from peers: EV/NTM Revenue and EV/NTM EBIT. We need to compute LLLT's NTM revenue and EBIT. NTM means next twelve months. Since we are at the end of 2025, NTM would be 2026? So we can use the projected 2026 revenue and EBIT from our base case? But we need to be consistent. Usually comps use forward estimates. We can use the base case 2026 revenue and EBIT as NTM. But we might also consider using the consensus? We'll just use our base case projections for that. However, the memo might want to show a range based on comps multiples applied to LLLT's metrics. We'll compute implied EV = multiple * (LLLT's NTM revenue or EBIT). Then equity value = EV + net cash, per share = equity value / shares. Then compare to current price.

We should also note that the comps multiples are given for peers, and we should use median. Median EV/NTM Revenue: sort: 7.0, 9.0, 11.0 => median 9.0? Actually 7,9,11 median is 9.0. EV/NTM EBIT: 28,35,42 median is 35. So median multiples: 9x revenue, 35x EBIT.

Now we need to compute LLLT's NTM revenue and EBIT. For base case: 2026 revenue growth 21% from 2025 revenue $820m => 820 * 1.21 = 992.2? Let's compute: 820 * 1.21 = 992.2 million. Operating margin 20% => EBIT = 992.2 * 0.20 = 198.44 million. For bull: 2026 revenue growth 25% => 8201.25 = 1025 million; op margin 21% => EBIT = 215.25 million. For bear: 2026 revenue growth 16% => 8201.16 = 951.2 million; op margin 17% => EBIT = 161.704 million.

We could use these for comps. But the comps cross-check is separate from DCF; we can compute a range of implied share prices using median multiples on these NTM metrics. However, the memo might ask: "Comps cross-check: implied EV and per-share range using median multiples." Possibly they want to apply median multiples to LLLT's projected 2026 metrics (revenue and EBIT) and see what EV and share price that yields, then compare to DCF results and current price. We'll do that.

But careful: The comps multiples are likely for next twelve months (NTM) revenue and EBIT. So using our 2026 projections is appropriate. But we need to ensure we are using the right year: The data we have is FY2025 actuals. The forecasts are for 2026-2030. So NTM is 2026. So yes.

Now, DCF calculations.

Let's compute base case.

First, we need to compute UFCF for each year. We have:

• Revenue: 2025 actual = 820 (we might need it for change in revenue from 2025 to 2026). We'll compute revenues for 2026-2030 using given growth rates.

Base case growth rates: 21%, 18%, 15%, 13%, 12% for 2026-2030.

So:

2025: 820 2026: 820 * 1.21 = 992.2 2027: 992.2 * 1.18 = 1,170.796? Actually 992.2 * 1.18 = 1,170.796 (let's compute precisely) 2028: 1,170.796 * 1.15 = 1,346.4154 2029: 1,346.4154 * 1.13 = 1,521.449? Let's compute: 1,346.4154 * 1.13 = 1,521.449402 2030: 1,521.449402 * 1.12 = 1,704.02333

We'll round to millions, maybe one decimal.

Now EBIT = operating margin * revenue.

Base case operating margins: 2026:20%, 2027:22%, 2028:24%, 2029:25%, 2030:26%.

So:

2026 EBIT = 992.2 * 0.20 = 198.44 2027 EBIT = 1,170.796 * 0.22 = 257.57512 2028 EBIT = 1,346.4154 * 0.24 = 323.1397 2029 EBIT = 1,521.4494 * 0.25 = 380.36235 2030 EBIT = 1,704.02333 * 0.26 = 443.04607

Now D&A: given as 2.5% of revenue. So each year D&A = revenue * 0.025.

Capex: 3.0% of revenue.

Change in NWC: 1.0% of incremental revenue. So we need revenue for previous year. For 2026, incremental revenue = 992.2 - 820 = 172.2. So change in NWC = 0.01 * 172.2 = 1.722. For 2027: 1,170.796 - 992.2 = 178.596, change NWC = 1.78596. 2028: 1,346.4154 - 1,170.796 = 175.6194, change = 1.756194. 2029: 1,521.4494 - 1,346.4154 = 175.034, change = 1.75034. 2030: 1,704.02333 - 1,521.4494 = 182.57393, change = 1.8257393.

We'll keep a few decimals.

Tax rate = 23%. So NOPAT = EBIT * (1 - 0.23) = EBIT * 0.77.

Then UFCF = NOPAT + D&A - Capex - ΔNWC.

Alternatively, we can compute: UFCF = EBIT*(1-tax) + D&A - Capex - ΔNWC.

Let's compute for each year.

We'll compute D&A and Capex as % of revenue.

2026: Revenue = 992.2 EBIT = 198.44 NOPAT = 198.44 * 0.77 = 152.7988 D&A = 992.2 * 0.025 = 24.805 Capex = 992.2 * 0.03 = 29.766 ΔNWC = 1.722 UFCF = 152.7988 + 24.805 - 29.766 - 1.722 = 146.1158

2027: Revenue = 1,170.796 EBIT = 257.57512 NOPAT = 257.57512 * 0.77 = 198.3328424 D&A = 1,170.796 * 0.025 = 29.2699 Capex = 1,170.796 * 0.03 = 35.12388 ΔNWC = 1.78596 UFCF = 198.3328424 + 29.2699 - 35.12388 - 1.78596 = 190.6929024

2028: Revenue = 1,346.4154 EBIT = 323.1397 NOPAT = 323.1397 * 0.77 = 248.817569 D&A = 1,346.4154 * 0.025 = 33.660385 Capex = 1,346.4154 * 0.03 = 40.392462 ΔNWC = 1.756194 UFCF = 248.817569 + 33.660385 - 40.392462 - 1.756194 = 240.329298

2029: Revenue = 1,521.4494 EBIT = 380.36235 NOPAT = 380.36235 * 0.77 = 292.8790095 D&A = 1,521.4494 * 0.025 = 38.036235 Capex = 1,521.4494 * 0.03 = 45.643482 ΔNWC = 1.75034 UFCF = 292.8790095 + 38.036235 - 45.643482 - 1.75034 = 283.5214225

2030: Revenue = 1,704.02333 EBIT = 443.04607 NOPAT = 443.04607 * 0.77 = 341.1454739 D&A = 1,704.02333 * 0.025 = 42.60058325 Capex = 1,704.02333 * 0.03 = 51.1206999 ΔNWC = 1.8257393 UFCF = 341.1454739 + 42.60058325 - 51.1206999 - 1.8257393 = 330.79961795

Now we have UFCFs. Next, we need to compute terminal value at end of 2030 using perpetuity growth.

Base case: g = 3%, WACC = 10%.

Terminal Value (TV) = UFCF2030 * (1+g) / (WACC - g) = 330.7996 * 1.03 / (0.10 - 0.03) = 330.7996 * 1.03 / 0.07 = 330.7996 * 14.7142857? Actually 1.03/0.07 = 14.7142857, but better compute: 330.7996 * 1.03 = 340.7236, divided by 0.07 = 4,867.48. Let's compute precisely: 330.79961795 * 1.03 = 340.72360649. / 0.07 = 4,867.4800927 ~ 4,867.5 million.

Now we need to discount UFCFs and TV to present (beginning of 2026). We'll assume discounting end-of-year cash flows. So present value factor for year n = 1/(1+WACC)^n.

WACC = 10% = 0.10.

Year 2026 (n=1): PV factor = 1/1.1 = 0.9091 Year 2027 (n=2): 1/1.1^2 = 0.8264 Year 2028 (n=3): 1/1.1^3 = 0.7513 Year 2029 (n=4): 1/1.1^4 = 0.6830 Year 2030 (n=5): 1/1.1^5 = 0.6209

We'll compute PV of each UFCF and TV.

PV(UFCF2026) = 146.1158 * 0.9091 = 132.83? Let's compute: 146.1158 * 0.9090909 = 146.1158 / 1.1 = 132.8325. Actually 146.1158 / 1.1 = 132.8325. PV(UFCF2027) = 190.6929 / 1.1^2 = 190.6929 / 1.21 = 157.5983. PV(UFCF2028) = 240.3293 / 1.1^3 = 240.3293 / 1.331 = 180.57? Let's compute: 1.1^3 = 1.331, 240.3293/1.331 = 180.563 (approx). PV(UFCF2029) = 283.5214 / 1.1^4 = 283.5214 / 1.4641 = 193.62? 1.1^4 = 1.4641, 283.5214/1.4641 = 193.62. PV(UFCF2030) = 330.7996 / 1.1^5 = 330.7996 / 1.61051 = 205.45? 1.1^5 = 1.61051, 330.7996/1.61051 = 205.41. PV(TV) = 4,867.48 / 1.1^5 = 4,867.48 / 1.61051 = 3,023.0? Let's compute: 4,867.48 / 1.61051 = 3,023.0 approx.

We'll sum these to get Enterprise Value (present value of UFCFs + TV). Then add net cash $1,400 million to get equity value. Then divide by shares 190 million to get share price.

Let's compute more precisely with actual numbers to avoid rounding errors. We'll do calculations in a spreadsheet-like manner.

Better to keep numbers in millions and use more precision.

I'll compute step by step with high precision:

First, compute revenues exactly:

2025: 820

2026: 820 * 1.21 = 992.2 2027: 992.2 * 1.18 = 992.2 * 1.18 = let's calculate: 992.2 * 1 = 992.2, 992.2 * 0.18 = 178.596, sum = 1,170.796. Yes. 2028: 1,170.796 * 1.15 = 1,170.796 * 1.15 = 1,170.796 * 1 = 1,170.796, plus 0.151,170.796 = 175.6194, total = 1,346.4154. 2029: 1,346.4154 * 1.13 = 1,346.4154 * 1.13 = 1,346.4154 + 0.131,346.4154 (175.034002) = 1,521.449402. 2030: 1,521.449402 * 1.12 = 1,521.449402 + 0.12*1,521.449402 (182.57392824) = 1,704.02333024.

Now operating margins:

2026: 20% => EBIT = 992.2 * 0.2 = 198.44 2027: 22% => 1,170.796 * 0.22 = 257.57512 2028: 24% => 1,