Vc

5.84917884

d1(

0.020202707
0.06269863
0.221514092
0.374248593

d2

0.152734501

N(d1)
N(d2)

0.645890313
0.560696174

a) Net present Value

Shares outstanding
Price per share in cash
Total cash paid

900,000.00
27.00
24,300,000.00

Market price
Shares outstanding
Market price per share
Total value

900,000.00
24.00
21,600,000.00

Shares outstanding
Market price per share
Total value

1,500,000.00
34.00
51,000,000.00

Net present value

Market price
Synergistic benefits
Present value of the merger
Less cash paid
Value of Firm B
NPV

75,300,000.00
3,000,000.00
78,300,000.00
24,300,000.00
51,000,000.00
3,000,000.00

b) Price per share

Firm B+ Firm T
Synergistic benefits

Number of shares
Price per share

75,300,000.00
3,000,000.00
78,300,000.00
2,400,000.00
32.63

c) Premium
Shares outstanding
Premium per share

900,000.00
3
2,700,000.00

d) Price of merged firm

Shares issued to Firm T shareholders
Value of Firm B (after merger)

2700000
72,600,000.00

Synergistic benefits

Number of shares
Price per share

3,000,000.00
75,600,000.00
4,200,000
18

e) NPV
Additional share
Total sahres
Value

2,700,000.00
4,200,000.00

B
T
Synergy

51,000,000.00
21,600,000.00
3,000,000.00
75,600,000.00

cost of takeover

27,000,000.00

Gain in value
Loss

3,000,000.00
(24,000,000.00)

Review of the computation

The consultant did not accurately calcualte the value of the company. It should have been calculated as follows:
Year 0
cash flow
Discount factor

Year 1
Year 2
Year 3
12,000,000.00 12,360,000.00 12,730,800.00
0.89
0.80
0.71
165,552,113.70 10,714,285.71
9,853,316.33
9,061,531.98

Problem
#1 computation
# 2 WACC could not be equal to r.
# 3 PV 12M?

#4 Cash flow in perpetuity

Cost determined as 0.5m. The Benefit not clearly identified.
If 0.5m is assumed to be the net cash flow, this should not be added unless otherwise the benefit is refering to synergitic effect.
#5 WACC 10%
Elliot should have to take the weght of both WACC.

Recommondation

The valuation based on DCF methods revealed 164million while the offer was 144 million. I recommend the management to pro
Additional information required for the deccison are:
Profit after tax of both
Market value based on PE
Share price of both
EPS
No. of shares
WACC of both

en calculated as follows:
Terminal value
190,962,000.00
0.71
135,922,979.68

he benefit is refering to synergitic effect.

n. I recommend the management to proceed with the takeover.

Income Statement for the Year Ending December 31 (Millions of Dollars)

2009
Net Sales
$
63,122.0
Costs (except depreciation)
$
56,403.0
Depreciation
$
Total operating costs
$
56,403.0
Earning before int. & tax
$
6,719.0
Less interest
$
Earning before taxes
$
6,719.0
Taxes (40%)
$
1,307.0
Net income before pref. div.
$
5,412.0
Preferred div.
$
344.0
Net income avail. for com. div.
$
5,068.0
Common dividends
$
1,861.2
Addition to retained earnings
$
3,206.8
Number of shares (in millions)
Dividends per share
Balance Sheets for December 31 (Millions of Dollars)
Assets
Cash
Marketable Securities
Accounts receivable
other assets
Total current assets
other non current assets
Net plant and equipment
Total Assets

423
4.40

$
$

2009
7,867.0
67,243.0
450,301.0
8,088.0
533,499.0
32,237.0

4,967.0
570,703.0

Preferred Comm. Equity

9.9%
11.5%
0.080816
91.9%

Liabilities and Equity

Accounts Payable
Notes payable
Accruals
Total current liabilities
Long-term bonds
other non current liab
Minority interest
Preferred stock

Common Stock
Retained earnings
Common equity
Total liabilities and equity
Projected ratios and selected information for the current and projected years are shown below.
Inputs
Sales Growth Rate
Costs / Sales
Depreciation / Net PPE
Cash / Sales

Actual
2009

Projected
2010

Projected
2011

Projected
2012

17%
89%
0%
12%

17%
89%
0%
12%

17%
89%
0%
12%

17%
89%
0%
12%

marketable securities / Sales

Acct. Rec. / Sales
other current assets
Net PPE / Sales
Acct. Pay. / Sales
Accrual/Sales
longterm bond/sales
other current liabilities / Sales
Minority interest/sales
Preferred stock
Tax rate
Weighted average cost of capital (WACC)

107%
713%
13%
8%
765%
18%
32%
18%
3%
1%
19%
11.4%

107%
713%
13%
8%
765%
18%
32%
18%
3%
1%
19%
11.4%

107%
713%
13%
8%
765%
18%
32%
18%
3%
1%
19%
11.4%

107%
713%
13%
8%
765%
18%
32%
18%
3%
1%
19%
11.4%

a. Forecast the parts of the income statement and balance sheets necessary to calculate free cash flow.
Partial Income Statement for the Year Ending December 31 (Millions of Dollars)
Actual
2009
Net Sales
Costs (except depreciation)
Depreciation
Total operating costs
Earning before int. & tax

$
$
$
$
$

63,122.0
56,403.0
56,403.0
6,719.0

Projected
2010
$
$
$
$
$

74,042.1
66,160.7
66,160.7
7,881.4

Projected
2011
$
$
$
$
$

86,851.4
77,606.5
77,606.5
9,244.9

Projected
2012
$ 101,876.7
$ 91,032.5
$
$ 91,032.5
$ 10,844.2

Partial Balance Sheets for December 31 (Millions of Dollars)

Actual
2009

Operating Assets
Cash
Accounts receivable
Net plant and equipment
Accounts Payable
Accruals
Long-term bonds
Minority interest
Preferred stock

$
$
$
$
$
$
$
$

7,867.0
450,301.0
4,967.0
482,937.0
11,567.0
20,084.0
1,849.0
3,486.0

Projected
2010
$
9,228.0
$ 528,203.1
$
5,826.3
$ 566,485.1
$ 13,568.1
$ 23,558.5
$
2,168.9
$ 13,056.7

Projected
2011
$ 10,824.4
$ 619,582.2
$
6,834.2
$ 664,487.0
$ 15,915.4
$ 27,634.2
$
2,544.1
$ 15,315.5

Projected
2012
$ 12,697.1
$ 726,769.9
$
8,016.6
$ 779,443.3
$ 18,668.7
$ 32,414.9
$
2,984.2
$ 17,965.0

b. Calculate free cash flow for each projected year. Also calculate the growth rates of free cash flow each year to ensure that
there is constant growth (i.e., the same as the constant growth rate in sales) by the end of the forecast period.
Actual
Projected
Projected
Projected
Calculation of FCF
2009
2010
2011
2012
Operating current assets
458,168.0
537,431.1
630,406.6
739,467.0
Operating current liabilities
494,504.0
580,053.2
680,402.4
798,112.0
Net operating working capital
(36,336.0)
(42,622.1)
(49,995.8)
(58,645.0)
Net PPE
4,967.0
5,826.3
6,834.2
8,016.6
Net operating capital
(31,369.0)
(36,795.8)
(43,161.5)
(50,628.5)
Investment in operating capital
na
(5,426.8)
(6,365.7)
(7,466.9)
NOPAT
5,412.0
6,348.3
7,446.5
8,734.8
Free cash flow
na
11,775.1
13,812.2
16,201.7

Growth in FCF
Growth in sales

na

na
17.3%

17.3%
17.3%

17.3%
17.3%

c. Calculate operating profitability (OP=NOPAT/Sales), capital requirements (CR=Operating capital/Sales), and return on
invested capital (ROIC=NOPAT/Operating capital at beginning of year). Based on the spread between ROIC and WACC, do
you think that the company will have a positive market value added (MVA= Market value of company - book value of company
= Value of operations - Operating capital)?

Operating profitability
(OP=NOPAT/Sales)
Capital requirement
(CR=Operating capital/Sales)
Return on invested capital
(ROIC=NOPAT/Operating capital at
start of year)
Weighted average cost of capital (WACC)
Spread between ROIC and WACC

Actual
2009

Projected
2010

Projected
2011

Projected
2012

8.6%

8.6%

8.6%

8.6%

-49.7%

-49.7%

-49.7%

-49.7%

-20.2%
11.4%
-31.6%

-20.2%
11.4%
-31.6%

-20.2%
11.4%
-31.6%

na
na
na

d. Calculate the value of operations and MVA. (Hint: first calculate the horizon value at the end of the forecast period, which is
equal to the value of operations at the end of the forecast period. Assume that the annual growth rate beyond the horizon is 6
percent.)
Actual
2009
Free cash flow
Long-term constant growth in FCF
Weighted average cost of capital (WACC)
Horizon value
FCF in Years 1-7 and FCF8 + horizon value in Year 2016
Value of operations (PV of FCF + HV)

309,549.1

Operating capital

(31,369.0)

Market value added (MVA=Market value of

company - book value of company = Value of
operations - Operating capital)

340,918.1

11.4%

Projected
2011

Projected
2012

11,775.1

13,812.2

16,201.7

11.4%
10,573.1

e. Calculate the price per share of common equity as of 12/31/2010.

Actual
2009
Value of Operations
Plus Value of Mkt. Sec.
Total Value of Company
Less Value of Debt
Less Value of Pref.

Projected
2010

309,549.1
64,200.0
373,749.1
20,084.0
3,486.0

11.4%
11,136.3

11.4%
11,729.5

Value of Common Equity

Divided by number of shares
Price per share

350,179.1
423
827.8

omm. Equity
11.4%

2009
$ 482,937.0
11,567.0
$ 494,504.0
$ 20,084.0
$ 11,131.0
$
1,849.0
$
3,486.0
$ 531,054.0
$ 14,164.0
25,485.0
$ 39,649.0
$ 570,703.0

Projected
2013

Projected
2014

Projected
2015

Projected
2016

17%
89%
0%
12%

17%
89%
0%
12%

17%
89%
0%
12%

17%
89%
0%
12%

107%
713%
13%
8%
765%
18%
32%
18%
3%
1%
19%
11.4%

107%
713%
13%
8%
765%
18%
32%
18%
3%
1%
19%
11.4%

107%
713%
13%
8%
765%
18%
32%
18%
3%
1%
19%
11.4%

107%
713%
13%
8%
765%
18%
32%
18%
3%
1%
19%
11.4%

Projected
2013

Projected
2014

Projected
2015

Projected
2016

$ 119,501.3
$ 106,781.1
$
$ 106,781.1
$ 12,720.3

Projected
2013
$ 14,893.7
$ 852,501.1
$
9,403.4
$ 914,287.0
$ 21,898.4
$ 38,022.6
$
3,500.5
$ 21,073.0

each year to ensure that

period.
Projected
2013
867,394.8
936,185.4
(68,790.6)
9,403.4
(59,387.2)
(8,758.7)
10,245.9
19,004.6

$
$
$
$
$

140,175.1
125,254.2
125,254.2
14,920.9

Projected
2014
$
17,470.3
$ 999,983.8
$
11,030.2
$ 1,072,458.6
$
25,686.8
$
44,600.6
$
4,106.1
$
24,718.6

Projected
2014
1,017,454.1
1,098,145.5
(80,691.4)
11,030.2
(69,661.2)
(10,274.0)
12,018.4
22,292.4

$
$
$
$
$

164,425.4
146,923.2
146,923.2
17,502.2

Projected
2015
$
20,492.6
$ 1,172,981.0
$
12,938.4
$ 1,257,994.0
$
30,130.7
$
52,316.5
$
4,816.4
$
28,994.9

Projected
2015
1,193,473.6
1,288,124.6
(94,651.0)
12,938.4
(81,712.5)
(12,051.4)
14,097.6
26,149.0

$
$
$
$
$

192,871.0
172,340.9
172,340.9
20,530.1

Projected
2016
$
24,037.8
$ 1,375,906.7
$
15,176.8
$ 1,475,626.9
$
35,343.3
$
61,367.2
$
5,649.7
$
34,011.1

Projected
2016
1,399,944.6
1,510,970.2
(111,025.6)
15,176.8
(95,848.8)
(14,136.3)
16,536.5
30,672.8

17.3%
17.3%

17.3%
17.3%

17.3%
17.3%

17.3%
17.3%

Projected
2013

Projected
2014

Projected
2015

Projected
2016

8.6%

8.6%

8.6%

8.6%

-49.7%

-49.7%

-49.7%

-49.7%

-20.2%
11.4%
-31.6%

-20.2%
11.4%
-31.6%

-20.2%
11.4%
-31.6%

-20.2%
11.4%
-31.6%

Projected
2013

Projected
2014

Projected
2015

Projected
2016

19,004.6

22,292.4

26,149.0

30,672.8
2.0%
11.4%
333,965.2
237,038.3

Sales), and return on

n ROIC and WACC, do
y - book value of company

e forecast period, which is

beyond the horizon is 6

11.4%
12,354.2

11.4%
13,012.3

11.4%
13,705.3

1. Find the price today.

D0
rs
gs
gL

$4.40
17.4%
30%
6%

Year
Dividend

0
$4.40

Short-run g; for Years 1-2 only.

Long-run g; for Year 3 and all following years.
30%

6%
1
$5.71

2
$7.40

3
$9.59

4
$12.44

5
$16.13

PV of dividends
P0

P1

P2

4.86
5.37
5.93
6.55
7.23
7.99
8.83

6.30
6.96
7.69
8.49
9.38
10.36

8.17
9.03
9.97
11.01
12.16

82.06

96.34

113.11

Year
2009
2010
2011
2012
2013
2014
2015
2016
2017

Dividend
$4.40
$5.71
$7.40
$9.59
$12.44
$16.13
$20.92
$27.13
$28.76
252.2515

Terminal value
11.4%

$128.8221

$145.5315

$163.4551

2. Find the expected dividend yield.

Recall that the expected dividend yield is equal to the next expected annual dividend divided by the price at the beginning of the period.
Dividend yield =
Dividend yield =
Dividend yield =

D1
$5.706
4.43%

/
/

P0
$128.822

3. Find the expected capital gains yield.

The capital gains yield can be calculated by simply subtracting the dividend yield from the total expected return.
Cap. Gain yield= Expected return
Cap. Gain yield=
17.4%
Cap. Gain yield=
12.97%

Dividend yield
4.43%

Alternatively, we can recognize that the capital gains yield measures capital appreciation, hence solve for the price in one year, then
divide the change in price from today to one year from now by the current price. To find the price one year from now, we will have to
find the present values of the terminal value and second year dividend to time period one.

P2

+
(1 + rs)

D2

$163.455

+
1.17

$7.399

P1

P1

P1

$145.53

Cap. Gain yield=

Cap. Gain yield=
Cap. Gain yield=

(P1 P0)
$16.71
12.97%

/
/

P0
$128.8221

6
$20.92

7
$27.13

8
$28.76

= rs g L

he beginning of the period.

rn.

price in one year, then

om now, we will have to

captial gain

Price per share

Closing
High
Low
Average

Price per share

Basic earning per share
current year earning
value per share in cents
Number of shares
value per share

2009
12405
12900
6492
10599

105.99
12
5068
44763.1
423
105.82

2008
2007
2006
2005
2004
9550
13600
13350
10000
7780
13975
15810
13950
10280
7999
7498
12325
9790
6700
5240
10341 13911.7 12363.33 8993.333 7006.333

26372.81
Book value
Number of shares
Value per share

$380,567.07
423
$899.69

Earning in 2009
WACC (as above)
Retained earning (as above)
Return on equity
Growth in earning (2008-2017)

5412
0.113681
3206.8
0.174
0.015

Value of the company

Current earnings are a perpetuity with 100% payout
Growth in earnings
Total value
Number of shares
value per share

47606.85
17242.6
64849.45
423
153.3084

Decision Tree

2010
Prob.

2009

CFS

Time Periods, Earnings, Probabilities, and Decision Points

2011
2012
2013
2014
CFS
CFS
CFS
CFS
CFS

8%

10,902.88

11,841.74

12,861.45

13,968.96

15,171.84

16,478.31

11%

11,775.11

13,812.21

16,201.72

19,004.62

22,292.42

26,149.00

10,570.12

11,129.94

11,719.40

12,340.09

12,993.65

13,681.82

10,239.23

12,010.62

14,088.45

16,525.75

19,384.71

22,738.26

15%

Coefficient of Variatio

s
2015
CFS

2016
CFS

perpetuity
CFS

Prob.

NPV

Calculating step-by-step
Deviation
Sqrd dev

1,074,523.85

0.40

$429,810 (506,825.57)

256,872,160,950.37

805,172.27

892,013.74

0.40

$356,805 (579,829.62)

336,202,384,285.18

628,441.38

750,100.39

0.20

$150,020 (786,615.03)

618,763,210,421.91

17,897.27

975,401.39

30,672.78

33,433.33

14,406.44

26,671.98

Expected NPV = 936,635.11

Standard Deviation (SD) = 600,818.16
Coefficient of Variation (CV) = Std Dev/Expected NPV =
0.64

Sum = variance
Sq root of Var =

Sqrd*prob
102,748,864,380.15

134,480,953,714.07
123,752,642,084.38

360,982,460,178.60
600,818.16

A
2009
2008
2007
2006
2005
2004

A-A1
12405
9550
13600
13350
10000
7780
66685

Total
Average (A1)
Standard deviation

(A-A1)^2
(A-A1 )(M-M1)
1,666,250.69
6,153,617.64
2,446,617.36
2,098,850.97
6,179,367.36
9,864,200.97
4,998,950.69
9,419,938.47
1,241,367.36
2,979,095.97
11,116,667.36 29,783,555.14
27,649,220.83 60,299,259.17

DIVIDEND
440
620
660
493
290
120

11114.16667
2,351.56

M
2009
2008
2007
2006
2005
2004

1,290.83
(1,564.17)
2,485.83
2,235.83
(1,114.17)
(3,334.17)
0.00

36675
30566
35876
36121
29234
22975
191447

Average
Standard deviation

31907.83333
5,384.58

R
Beta

0.952431694
0.415947577

M-M1
(M-M1)^2
4,767.17
22,725,878.03
(1,341.83)
1,800,516.69
3,968.17
15,746,346.69
4,213.17
17,750,773.36
(2,673.83)
7,149,384.69
(8,932.83)
79,795,511.36
144,968,410.83

P1-P0
P1-P0+D (P1-P0+D)/P0
2855
3295
0.35
-4050
-3430
-0.25
250
910
0.07
3350
3843
0.38
2220
2510
0.32

Average return
standard deviation

0.176
-0.424
-0.104
0.206
0.146

0.030976
0.179776
0.010816
0.042436
0.021316
0.28532

0.09
-0.26
-0.12
0.13
0.16

0.0081
0.0676
0.0144
0.0169
0.0256

0.174
0.267076768

1.085404508
(P1-P0)/P0
0.2
-0.15
-0.01
0.24
0.27
Average
Standard deviation

0.970139

Beta

2.355469

0.11
0.182071415

0.1326

0.01584
0.11024
0.01248
0.02678
0.02336
0.1887

51000000
21600000
3000000
75600000
2700