Commercial Fixtures Case

b) As a third party under the same conditions (i.e. with the same information), what would you bid for the entire company (both halves)?  Why?

Since this project is a going concern, the levered terminal and present values are calculated using the weight average cost of capital (WACC) as the discount rate, which we calculate to be 16.17%.

For the purpose of calculating the net present value of the project, an appropriate cost of capital has to be calculated at which free cash flows of the project should be discounted. Since the project will be solely financed by selling new shares, cost of equity will be used as the discount rate. Beta for the company can be assumed to be equal to average of the betas of the competitors of the company. This average beta value comes out to be 1.2. Risk free rate is 0.17% while risk premium has been estimated to be 6%. Thus by putting these values in CAPM formula, we can find the cost of equity for the company which is 7.39%.

Thus, by year three the company will be making a profit off the investment as year three is 86.73 million profit by 55.35 cost giving the company a 31.38 million dollar surplus. Generally, a period of payback of three year or less is acceptable (Reference Entry) causing this project to be viable based off the payback analysis. Although, these calculations are flawed. The reason for this is because the time value of money is not taken into effect when calculating payback periods which is where IRR can further assist in a more realistic financial picture (Reference Entry).

The next step was to calculate the free cash flows for the eleven-year period. In order to do so, we used to following formula: FCF = EBIT(1-tax) + depreciation - change in NWC – CapEx. From here, we used to WACC of 13.89% previously calculated, in order to find the present value of each FCF.

In order to arrive at the non-operating cash flows in year 10, we must add together the net cash flows from investing and financing activities.  The non-operating cash flow when the project is terminated in year 10 is $902,000.

Before moving forward to compute the present value of these cash flows, a terminal value is required to forecast the long term value of the company after 5 years. . Following formula is used to calculate the terminal value.

10. What is the correct capital structure and weighted average cost of capital for discounting the investment’s free cash flow. Assume a 35% tax rate. A correct response requires that you define capital structure and Weighted Average Cost of Capital (WACC) with a formula. When defining a term with a formula be sure that all the variables are also defined.

Taking the CAPM equation, we were able to figure out eh cost of equity and in its credit range

* Determine the investment’s value without leverage, VU, by discounting its free cash flows at the

3. What restructuring option – Icahn’s spin-off proposal or the company’s targeted stock proposal – will create the most value for shareholders? For creditors? For the firm’s other stakeholders?

What is the relevance of the terminal year cash flow? Which factors must be considered when estimating the terminal year cash flow?

4. AFTER VALUING PARAMOUNT, COMPARE YOUR VALUATION TO THE MARKET PRICE. ARE THEY SIMILAR? IF NOT, HOW CAN YOU RECONCILE THEM?

We assume that risk free rate (Rf) equals rate of long-term Treasury Bonds (as the project’s life is 10 years), so Rf = 9.5%.

1. Identify comparable firms that have growth, cashflow and risks similar to those of target firm whose value is in question.