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Value-Based Management - Acquisition Values

You have been hired as a consultant to Kulpa Fishing Supplies (KFS), a company that is seeking you increase its value. The company's CEO and founder, Mia Kulpa, has asked you to estimate the value of two privately held companies that KFS is considering acquiring.

The first acquisition target is a privately held company in a mature industry. The company currently has free cash flow of $20 million. Its WACC is 10% and it is expected to grow at a constant rate of 5%. The company has marketable securities of $100 million. It is financed with $200 million of debt, $50 million of preferred stock, and $210 million of book equity.

1. What is its value of operations?
2. What is its total corporate value? What is its value of equity?
3. What is its MVA (MVA = Total corporate value - Total book value)?

The second acquisition target is a privately held company in a growing industry. The target has recently borrowed $40 million to finance its expansion; it has no other debt or preferred stock. It pays no dividends and currently has no marketable securities. KFS expects the company to produce free cash flows of -$5 million in 1 year, $10 million in 2 years, and $20 million in 3 years. After 3 years, free cash flow will grow at a rate of 6%. It's WACC is 10% and it currently has 10 million shares of stock.

1. What is its horizontal value (that is, its value of operations at Year 3)? What is its current value of operations (that is, at time zero)?
2. What is its value of equity on a price per share basis?

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Solution:

The first acquisition target is a privately held company in a mature industry. The company currently has free cash flow of $20 million. Its WACC is 10% and it is expected to grow at a constant rate of 5%. The company has marketable securities of $100 million. It is financed with $200 million of debt, $50 million of preferred stock, and $210 million of book equity.

1. What is its value of operations?
FCFo=$20 million
Value of operations=FCFo*(1+g)/(WACC-g)=20*(1+5%)/(10%-5%)=$420 million

2. What is its total corporate value? ...

Solution Summary

Solution describes the steps to find out value of operations, MVA and total corporate value

$2.19