Professional Documents
Culture Documents
CHAPTER 9
2. The value of the bid to Newscorps shareholders is the value of the
assets acquired in the merger. This includes the value of the
equity acquired plus the liabilities assumed by the buyer. The
estimat4ed cost of the acquisition was thus ($60 x 82 million
shares) + $1.46 billion = 6.38 billion. This is an estimate because
the book value of Dow Joness debt only approximates the
preferred market value, although the approximation is probably
reasonably close.
4. a. The terminal value = 700*(1+.04)/(.08-.04) = $18,200.
Discounting the annual free cash flows plus the terminal value at
8 percent, the MAP = $11,926.
b. The terminal value = 700*(1+.05)/(.07-.05) = $36,750.
Discounting the annual free cash flow plus the terminal value at
7 percent, the MAP = $25,757.
c. The MAP increases 116 percent when the discount rate falls one
percentage point and the perpetual growth rate rises by the
same amount. Plausible changes in the discount rate and the
perpetual growth rate can cause large changes in estimated
firm value. This is especially true when the initial rates are
similar.
6. a. EBIT = $50 million. As a stand-alone company, typical debt
would be .40 x $250 million = $100 million. At a 10% interest
rate, interest expense would be $10 million. Therefore, profit
before tax = $50 10 = $40 million. Profit after tax = $40(1-.34)
= $26.4 million. Therefore the value of the division's equity
relative to comparable firms is $26.4 x 12 = $316.8 million.
Adding liabilities, Value of division = $316.8 + $100 = $416.8
million. This should be the owner's minimum acceptable price.
b. From the acquirer's perspective, this is essentially a "make-orbuy" decision. Because the acquirer can "make" a like operation
for a present value cost of $450 million, he should not pay more
than this to "buy" the division. (This assumes the opportunity
costs of being slower to market are included in the $450 million
price.)
2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
16.9
17.8
1.6
2.0
3.6
1.5
17.9
18.0
1.3
1.8
4.4
1.5
Here are my indicators of value for Scotts. In coming to these numbers, I believe
that Scottss somewhat higher historical and projected growth rates, combined with
dominant positions in its chosen markets,warrant numbers that are in the upper half
of the indicated valuation ranges. However, the companys somewhat smaller size
suggests some caution. I have selected multiples for the first two ratios roughly 10
percent above the sample median and 5 percent above the mean. Scottss mediocre
gross margins, especially for a company that dominates its markets, suggest that
investors will pay less per dollar of sales for Scotts than for peers, resulting in lower
than average multiples for the next two ratios. I have chosen representative
multiples for the last two ratios.
Price/earnings (X)
MV firm/EBIT(1-Tax rate (X)
MV equity/sales (X)
MV firm/sales (X)
MV equity/BV equity (X)
MV firm/BV firm (X)
18.7
19.4
1.1
1.5
4.0
1.5
The implied value of Scottss common stock for each indicator is:
2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Looking at these numbers,my best guess of a fair price for Scottss shares on
November 1, 2007 is$33.00. I think $29.88 is the best single estimate, but because
all of the other estimated values are above this figure, I have raised my best guess by
about 10 percent. $33.00 compares to an actual price on the valuation date of
$38.69, so my estimate is about 17 percent low, within my notion of the tolerances
inherent in business valuation. Many other estimates are, of course, possible.
12. Price per share = $5 million/400,000 shares = $12.50 per share. Pre-money value =
1.6 million shares X $12.50 = $20 million. Post-money value = 2 million shares X
$12.50 = $25 million. Alternatively, post-money value = pre-money value +
$5million = $25 million.
2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
14.
2012 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.