Assignment Samples

Accounting & Finance

QUESTION : – The questions asked in this set pertains to a case analysis. The students are required to find out on the basis of calculations, the weighted averagae cost of capital, which would be used to discount the cash flows of the company being acquired by the parent company. Students have also been asked to perform comparable multiples valuation analysis and comparable transactions valuation analysis of the company being acquired. Warren Buffet’s acquisition strategy also needs to be discussed and justified in this context.
SOLUTION : –
1) Weighted Average Cost of Capital
For the period ended on 31 December
2011 2012 2013 2014 2015
Earnings before taxes 1,483.50 1,805.50 2,097.00 2,517.00 2,474.00
Income tax expense (499.70) (594.00) (695.00) (830.00) (816.00)
Tax Rate 33.68% 32.90% 33.14% 32.98% 32.98%
Interest expense 13.5 12.8 38 76 69
After tax expenses 8.95 8.59 25.41 50.94 46.24
Long-term debt – Current $14.70 $0.50 $204.00 $2.00 $1,093.00
Long-term debt – Non current $221.90 $207.70 $3,603.20 $3,569.00 $3,493.00
$236.60 $208.20 $3,807.20 $3,571.00 $4,586.00
Total Interest Expenses (five years) 140.13
Total Long Term Debt (five years) $12,409.00
After tax Average Cost of debt 1.13%
Calculation of Cost of Equity
Using CAPM
Risk free rate of return + beta ( Market risk premium) 10.79%
Risk free rate of return 2.68%
Market risk premium 6.90%
Beta 1.175
Beta
United Technologies Corporation (UTX-US) 1.11
Honeywell International (HON-US) 1.06
Eaton (ETN-US) 1.54
Parker-Hannifin (PH-US) 1.49
Rolls Royce Holdings (RR.-LN) 1.17
Rockwell Collins (COL-US) 0.73
GKN (GKN-LN) 1.32
Spirit AeroSystems Holdings (SPR-US) 1.12
Meggitt (MGGT-LN) 0.79
B/E Aerospace (BEAV-US) 1.09
Woodward (WWD-US) 1.23
Triumph Group (TGI-US) 1.45
Average Beta 1.175
Calculation of WACC
Value Cost Weight
Equity $ 10,957.00 10.79% $ 1,181.99
Debt $4,586.00 1.13% $ 51.79
$ 15,543.00 $ 1,233.77
WACC 7.94%
2)
Stock price Diluted Shares Market Capitalization Debt Enterprise Value Revenue EBITDA Net Income EPS
United Technologies Corporation (UTX-US) $96.07 836,432,010 $80,356.02 20,425.00 $100,781.02 56,098.00 9,613.00 7,608.00 $ 9.10
Honeywell International (HON-US) $103.57 769,322,910 $79,678.77 12,068.00 $91,746.77 38,581.00 7,699.00 4,768.00 $ 6.20
Eaton (ETN-US) $52.04 458,900,000 $23,881.16 8,449.00 $32,330.16 20,855.00 3,267.00 1,979.00 $ 4.31
Parker-Hannifin (PH-US) $96.98 135,102,576 $13,102.25 3,036.80 $16,139.05 11,360.80 1,582.10 806.8 $ 5.97
Rolls Royce Holdings (RR.-LN) £ 575.00 1,838,677,392 £ 1,057,239.50 £ 4,870.20 £ 1,062,109.70 £ 20,929.50 £ 3,556.10 £ 126.60 £ 0.07
Rockwell Collins (COL-US) $92.30 131,131,426 $12,103.43 2,128.00 $14,231.43 5,244.00 1,260.00 686 $ 5.23
GKN (GKN-LN) £ 308.40 1,674,100,000 £ 516,292.44 £ 1,034.00 £ 517,326.44 £ 7,231.00 £ 901.00 £ 197.00 £ 0.12
Spirit AeroSystems Holdings (SPR-US) $50.07 135,521,540 $6,785.56 1,133.20 $7,918.76 6,643.90 1,044.10 788 $ 5.81
Meggitt (MGGT-LN) £ 374.70 775,167,523 £ 290,455.27 £ 1,198.50 £ 291,653.77 £ 1,647.20 £ 401.70 £ 182.10 £ 0.23
B/E Aerospace (BEAV-US) $42.37 102,110,278 $4,326.41 2,034.10 $6,360.51 2,729.60 537.6 285.7 $ 2.80
Woodward (WWD-US) $49.66 61,915,755 $3,074.74 959.4 $4,034.14 2,038.30 339.1 181.5 $ 2.93
Triumph Group (TGI-US) $39.75 49,328,999 $1,960.83 1,417.30 $3,378.13 3,886.10 1.5 -1,048.00 $ (21.25)
Equity Value Multiple
P/E
United Technologies Corporation (UTX-US) 10.56x
Honeywell International (HON-US) 16.71x
Eaton (ETN-US) 12.07x
Parker-Hannifin (PH-US) 16.24x
Rolls Royce Holdings (RR.-LN) 8351.02x
Rockwell Collins (COL-US) 17.64x
GKN (GKN-LN) 2620.77x
Spirit AeroSystems Holdings (SPR-US) 8.61x
Meggitt (MGGT-LN) 1595.03x
B/E Aerospace (BEAV-US) 15.14x
Woodward (WWD-US) 16.94x
Triumph Group (TGI-US) (1.87x)
High 8351.02x
Low (1.87x)
Mean 1056.57x
Median 16.48x
3) Enterprise Value Multiple
EV / Revenue EV / EBITDA
United Technologies Corporation (UTX-US) 1.80x 0.10x
Honeywell International (HON-US) 2.38x 0.08x
Eaton (ETN-US) 1.55x 0.10x
Parker-Hannifin (PH-US) 1.42x 0.10x
Rolls Royce Holdings (RR.-LN) 50.75x 0.00x
Rockwell Collins (COL-US) 2.71x 0.09x
GKN (GKN-LN) 71.54x 0.00x
Spirit AeroSystems Holdings (SPR-US) 1.19x 0.13x
Meggitt (MGGT-LN) 177.06x 0.00x
B/E Aerospace (BEAV-US) 2.33x 0.08x
Woodward (WWD-US) 1.98x 0.08x
Triumph Group (TGI-US) 0.87x 0.00x
High 177.06x 0.13x
Low 0.87x 0.00x
Mean 26.30x 0.06x
Median 2.15x 0.08x
4)
PCC FORECASTED FINANCIALS USING MANAGEMENT FORECASTS
In Millions (amount in $ million)
Period At the end of Year
Year 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Revenue 10,005 10,858 12,454 14,344 16,489 18,087 19,172 20,323 21,542 22,834 24,204
EBITDA 2,612 3,263 3,681 4,208 4,837 5,283 5,600 5,936 6,292 6,670 7,070
Less: Depreication 325 349 357 358 368 380 561 595 631 669 709
EBIT 2,287 2,914 3,324 3,850 4,469 4,903 5,039 5,341 5,661 6,001 6,361
Less: Interest expenses
Less: Tax expenses (816) (933) (1,053) (1,203) (1,383) (1,511) (1,601) (1,697) (1,799) (1,907) (2,021)
Preofit After tax 1,471 1,981 2,271 2,647 3,086 3,392 3,437 3,644 3,862 4,094 4,340
Add: Depreciation 325 349 357 358 368 380 561 595 631 669 709
Less: Investment in Working Capital 792 662 472 352 239 253 268 284 301 275
Less: Capital Exenditures 702 1,086 1,245 1,434 1,649 1,809 575 610 646 685 726
Free Cash Flows 1,094 453 721 1,099 1,453 1,725 3,171 3,361 3,562 3,776 4,047
Terminal Value 221,387
Total FCFE 1,094 453 721 1,099 1,453 1,725 3,171 3,361 3,562 3,776 225,434
PV Factor at WACC rate 1.0000 0.9265 0.8583 0.7952 0.7367 0.6825 0.6324 0.5858 0.5428 0.5028 0.4659
PV 1,094 419 619 874 1,071 1,177 2,005 1,969 1,934 1,899 105,023
Discounted Value $ 118,083.07 million
Number of shares 138.6 millon
Value per share $ 851.97
Growth Rate 6%
Sensitivity Analysis
Growth Rate
$ 851.97 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
WACC 1% 165.09 (2,531.29) (1,196.32) (751.33) (528.83) (395.34) (306.34) (242.77) (195.09) (158.01)
2% 2,574.07 154.64 (2,312.71) (1,091.01) (683.78) (480.17) (358.00) (276.55) (218.37) (174.74)
3% 1,242.32 2,361.31 145.05 (2,114.67) (995.68) (622.68) (436.18) (324.28) (249.68) (196.39)
4% 800.38 1,142.31 2,168.12 136.24 (1,935.09) (909.29) (567.36) (396.39) (293.81) (225.42)
5% 580.79 737.64 1,051.36 1,992.51 128.14 (1,772.10) (830.94) (517.23) (360.37) (266.25)
6% 450.05 536.47 680.50 968.56 1,832.76 120.68 (1,624.02) (759.82) (471.76) (327.73)
7% 363.68 416.62 496.04 628.40 893.12 1,687.28 113.80 (1,489.37) (695.21) (430.49)
8% 302.61 337.39 386.08 459.12 580.85 824.31 1,554.69 107.45 (1,366.84) (636.45)
9% 257.31 281.32 313.33 358.15 425.37 537.42 761.50 1,433.74 101.59 (1,255.23)
10% 222.51 239.71 261.82 291.31 332.59 394.51 497.71 704.11 1,323.30 96.17
11% 195.01 207.70 223.55 243.94 271.11 309.17 366.24 461.37 651.62 1,222.39
12% 172.82 182.39 194.09 208.71 227.52 252.59 287.69 340.34 428.09 603.59
13% 154.57 161.94 170.77 181.57 195.08 212.43 235.58 267.98 316.58 397.59
14% 139.36 145.11 151.92 160.08 170.06 182.53 198.56 219.94 249.87 294.77