Institut für Strategische Unternehmensführung und Finanzierung Lehrbeauftragter Dr. Stefan Gros MA - Theory and Practise of Business Valuation Test Exam Date 09th February 2013 Semester:.... Instructions Keep the Exam-booklet as it is. Use back pages if necessary. Start with the Front page Write your student ID/matriculation number on all sheets at the right top. Check whether your booklet has 14 sheets. The exam (90 minutes) consists of tasks, which all need to be solved. Master Students will have additional tasks in Chapter IV. Results can be rounded, one digit i.e. 10,6 for 10,63345654. Write your solution directly below the task. If necessary use the back page. Demonstrate the approach that leads to your results. This also applies to multiple choice questions! Multiple choice questions are to be solved by ticking the right answer. Calculators can be used. Please leave the exam on your table. It will be collected. Dr. Gros and the Team wish you SUCCESS! Total Points: Score:.... 1
I. Topic: Valuation Techniques 105 Points in total 1) Frameworks for Valuation 1a) Which of the following valuation methods does not assume the WACC is constant? Choose the right answer! A: The discounted cash flow model B: The economic-profit model C: The adjusted present value model D: None of these. They all assume the WACC is constant. (5 Points) 1b) The APV model uses the following breakdown to value the firm: Adjusted Present value = Enterprise value as if all equity financed + Present value of Tax shields. The value of equity = Disc. Economic profit+ invested capital + non-operating assets non equity claims. A firm s estimated present value of economic profit is 250 Mio. Its estimated invested capital is 350 Mio. It has cash holdings of 56 Mio. The value of debt and capitalized operating leases are 100 Mio. and 26 Mio., respectively. What is the estimated value of equity? 2
2) Reorganizing the Financial Statements Given the following financial statements, calculate NOPLAT, Working Capital, invested capital and total funds invested. INCOME YEAR BALANCE SHEET YEAR STATEMENT Revenues 200,0 Working cash 10 Cost of Sales (80,0) Accounts Receivable 30 Selling Costs (50,0) Inventories 10 Depreciation (20,0) Current assets 50 Operating Profit 50,0 Interest Expense (4,0) Property, Plant and Equipment 150 Gain on sale - Prepaid pension assets 5 Earnings before (13,8) Total assets 205 Taxes Net income 32,2 Accounts payable 6 Short-term debt 12 Restructuring reserves 7 Current liabilities 25 Operating tax 20% rate Marginal tax rate 20% Long-term debt 70 Shareholders Equity 110 Liabilities and equity 205 (5 Points) 3
3) Estimating Continuing value An Analyst is estimating the continuing value after the explicit forecast period using the economic-profit formula. The analyst estimates that invested capital at the end of the explicit forecast period will be 3.000 and the ROIC on existing capital after the explicit forecast period will be 14 percent. NOPLAT in the year following the explicit forecast period is expected to be 600 and is expected to grow at 1 percent per year. The RONIC is expected to be 10 percent, and the cost of capital is 6 percent. What is the continuing value (CV) after the explicit forecast period? (10 Points) 4) Cost of Capital: a) SP Automotive is a Brazilian supplier to OEM car producers worldwide, based on a patented special part for diesel engines. Over the past year, profitability has been strong and the share price has risen from R$15 per share to R$25 per share. The company has 20 million shares outstanding. The companies borrowing is conservative; the company has only R$100 Mill. of debt. The debt trades at a yield to maturity 50 basis points above Brazilian risk free bonds. SP Automotive has a market beta of 0.8. If the Brazilian risk free rate is 5 percent, the market risk premium is 5 percent and the marginal tax rate is 15 percent, what is SP Automotive s cost of capital? 4
4) b) SP Automotive is considering a leveraged recapitalization of the company. Upon announcement, management expects the share price to rise by 10 percent. If the company raises R$200 Mio. in new debt to repurchase shares can the company repurchase? Assuming management will actively manage the new capital structure, estimate the company s new market beta. If the company s cost of debt rises to 100 basis points above the Brazilian risk-free rate, what will its new cost of capital equal? c) Your company, Ingolstadt World AG has announced its intention to purchase SP Automotive (see question 1). If the german risk free rate is 2 percent and the beta of Ingolstadt World AG is 0,9. What is the cost of capital for SP Automotive once under Ingolstadt World AGs control? d) In 2011, the median price earnings ratio for the S&P500 was 11.1., if the long run return on equity is 15 percent and the long-run growth in GDP is expected to be 5,7% (3,5 real growth and 3,2% inflation), what is the real cost of equity implied by the equity-denominated key value driver formula? 5
5) Moving from Enterprise to Equity Value a) Nordwind Plc. manufactures, markets, and distributes wind mills for energy production. Using discounted free cash flow, you value the company s operations at 4.500 Mio. The company has a 20% stake in a non consolidated subsidiary. The subsidiary is valued at 1.000 Mio. The investment is recorded on Nordwind Plc s balance sheet as an equity investment of 100 Mio. Nordwind Plc. is looking to increase its ownership. The company s marginal tax rate is 25%. Based on this information, what is Nordwind Plc. s enterprise value? If new management announced its plan to sell the company s stake in the subsidiary at its current value, how would that change your valuation? b) Nordwind Plc. has unfunded pension liabilities value at 200 Mio., recorded as a long term liability. Nordwind Plc. has detailed a potential legal judgement of 100 Mio. for defective engines in its annual report. Since Management estimates a 90% likelihood the judgement will be enforced against the engine maker and not Nordwind Plc., they did not report a liability on the balance sheet. The company s marginal tax rate is 25%. If Nordwind Plc. s enterprise value is 4.800 Mio, what is Nordwind Plc. s equity value? 6
To finance customer purchases, Nordwind Plc. recently started a customer financing unit. Nordwind s income statement and balance sheet are provided: $ million Income statement Balance sheet Sales of machinery 1.500 Operating assets 2.200 Revenues of financial products 400 Financial receivables 4.000 Total revenues 1.900 Total assets 6.200 Cost of goods sold -1.000 Interest expense of financial products -350 Operating liabilities 400 Total operating costs -1.350 General obligation debt Debt related to customer financing 3.600 Operating profit 550 Stockholders' equity 2.200 Interest expense, general obligation -80 Total liabilities and equity 6.200 Net income 470 5) c) Separate Nordwind Plc. s income statement and balance sheet into two segments: manufacturing and customer financing unit. Assume equity in the financing subsidiary is the difference between finance receivables and the debt related to those receivables. What is the return on invested capital for the manufacturing segment? What is the return in equity for the customer financing subsidiary? d) In Question c, we calculated ROE based on an equity calculation equal to the difference between receivables and the debt related to those receivables. What might this ROE measurement lead to a result that is too high? 7
6) Calculating Results and Scenarios You are valuing Distress Co., a company struggling to hold market share. The company currently generates 120 Million in revenue, but its revenue is expected to shrink to 100 Million next year. Cost of Sales currently equals 90 Mio. and depreciation equals 18 Mio. Working Capital equals 36 Mio. and equipment equals 120 Mio. Using this data, construct operating profit and invested capital for the current year. You decide to build an - as is - valuation of Distress Co. To do this, you forecast each ratio ( such as cost of sales to revenues) at its current level. Based on this forecast method, what are the operating profits and invested capital expected to be next year? What are two critical operating assumptions (Identify one for profits, and one for capital) embedded in this forecast method? (10 Points) 8
7) Using Multiples in Valuation $ million Company 1 Company 2 Company 3 Market data Share price (dollars) 25 16 30 Shares outstanding (millions) 5 8 15 Short-term debt 25 15 30 Long-term debt 50 70 40 Operating profit EBITDA 25 30 59 EBITA 22 23 51 a. The Data above present market and profit data for three companies. Using this data compute enterprise value to EBITA for Companies 1 and 2. Is the net difference between Company 1 and 2 the same for both ratios? If not, why might this be? b. The Data above present market and profit data for three companies. If company 3 has non operating assets valued $50 Mio., what are the company s appropriate enterprise value to EBITDA and enterprise value to EBITA Multiples? 9
7c) You are valuing multiple steady state companies in the same industry. Company A is projected to earn 160 in EBITA, grow at 2% per year and generate ROIC s equal to 15%. Company B is projected to earn 10%. What is the enterprise value to EBITA multiples for both companies? Does higher growth lead to a higher multiple in this case? 7d) You are valuing, multiple steady state companies in the same industry. Company A is projected to earn $160 in EBITA, grow at 2 % per day and generate ROICs equal to 15%. Company C is projected to earn 120 in EBITA, grow at 5 % per year, and generate ROICs equal to 12%. Both companies have an operating tax rate of 25% and a cost of capital of 10%. What are the enterprise-value-to EBITA multiples for both companies? Does higher growth lead to a higher multiple in this case? Why do the results differ between Questions 3 and 4? 10
7e) Two companies have the same long-term prospects concerning growth and ROIC. One of the companies temporarily stumbles during a new product launch, and profits drop considerably as the company scrambles to fix the error. Will this company trade at a higher or lower enterprise value multiple than its stable peer? Why? 7f) Cherry AG is financed entirely by equity. The company generates operating profit equal to 80million. Cherry AG currently trades at an equity value of 900 million. At a tax rate of 25%, what is the price-to-earnings multiple for Cherry AG? New management decides to increase leverage through a share repurchase. The company issues a 400 Mio. bond to repurchase 400 Mio. in equity. If the bond pays interest at 5% and share price remains unchanged, what is the company s new price to earnings ratio? How can you predict the direction the P/E ratio will move without performing the calculation? 11
III. Topic: Managing for Value 15 Points in total 1) Performance Management & M&A 1a) List and Explain the five main reasons a given firm might be the best owner of a business A: B: C: D: E: (5 Points) 1b) Describe five acquisition archetypes that often create value for both the acquirer and the seller. Based on situations with which you are familiar, rank these archetypal strategies from easiest to hardest to plan and execute. 12
2) Capital Structure Explain why companies with the same credit rating can have very different capital structures. (5 Points) 13