## [answered] Case PRIVATE EQUITY CASE: MERGER CONSOLIDATION The questions below COMBINE the Ohio &amp;amp; Maryland PT acquisitions as if they are a single c...

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Case PRIVATE EQUITY CASE: MERGER CONSOLIDATION The questions below COMBINE the Ohio &amp; Maryland PT acquisitions as if they are a single c

Learning Objectives

At the end of the course, to apply the financial analysis

and decision making techniques to size-up a business and make

Reading Sections of the Cohen Finance Workbook as necessary for review, and Wk1-6 Solutions as necessary.

1 Look at beginning and end of case to see what is going on.

2 Closely examine the questions you have to answer - they simplify the case

situation to create a doable final exam assignment.

3 Figure out what weekly solutions and Cohen Finance Workbook sections you might need to review.

4 Proceed to answer the questions, one-at-a-time, as you refer to the your needed explanatory mater Questions ANSWER IN THE TABS

Q1 Calculate the cost of capital (k-wacc) for the two acquisition companies combined, as if they are a s

Page 7 of the case has the inputs; supply missing inputs using judgment and what you learned in th

Q2 Complete the FCF Valuation and the Market Multiples Valuation. Some data is entered for you; som

The yellow-shaded cells guide you. Data is for Ohio and Maryland PT companies combined.

Explain what your analysis tells you about the likely value of these companies (combined as if it wa

Q3 Calculate the debt capacity of the combined PT companies (see Financial Statements tab). Disrega

panels on the Q3 tab - use only the debt capacity panel. Explain how much additional debt can be b

Q4 Answers here pull together the analysis you did for Q1, Q2 and Q3. See the questions on the Q4 ta THERE IS NO SINGLE CORRECT ANSWER.

USE TEMPLATE RESULTS , CASE FACTS, AND YOUR JUDGMENT.

ACT LIKE A PROFESSIONAL?NOT LIKE A STUDENT. ions as if they are a single company? utions as necessary. ons you might need to review.

our needed explanatory material. es combined, as if they are a single company (Column D on Q1 tab)

ent and what you learned in this course.

me data is entered for you; some you must enter.

T companies combined.

mpanies (combined as if it was a single company).

ncial Statements tab). Disregard the yellow-shaded

much additional debt can be borrowed See the questions on the Q4 tab. THUMBNAIL SKETCH:

BRIEF ANALYSIS

DUPONT RATIOS

HISTORICAL RAI/S &amp; B/S FORECAST

TIE

NORMAL DEBT RATIO WORKING CAPITAL I/S, B/S, &amp; RATIOS

STOCK PRICE

MKT CAP

EXTENDED ANALYSIS

FULL RATIOS

LIQUIDITY

LEVERAGE

ASSET USE

PROFITABILITY

VALUATION

GROWTH

CAPITAL BUDGETIN OP &amp; CAP NATCF, NPV, IRR, PAYBACK FINANCING EFN ANALYSIS STEPS:

1-HISTORICAL RATIOS

2-K-WACC

3-CAPITAL BUDGETING

4-FORECAST &amp; EFN

5-EQUITY VALUATION

6-FINANCING

VALUATION DEBT EQUITY DEBT EQUITY

EBIT CHART income risk control mktblty flexblty timing K-WACC ENTERPRISE VALUE USING FREE CASH FLOW MARKET MULTIPLES: P/E, MV/BV, REV, EBIT INCOME STATEMENT

Revenue

Cost of sales

Gross profit

Other operating income

Other operating expenses

Total cost and expenses

Operating profit (EBIT)

Interest, finance costs

Profit before tax

Income tax

Net profit after tax

Dividends

Reinvested in the business BALANCE SHEET

ASSETS

LIABILITIES AND EQUITY

Current assets

Current liabilities

Cash

Investments

Other accruals

Tax liabilities

Inventories

Short-term loans, leases

Non-current assets

Non-current liabilities

Property, plant &amp; equipmenLoans, debt, leases due after 1 year

Investment property

Retirement benefit obligation

Goodwill

Deferred tax liabilities

Total non-current liabilities WORKING CAPITAL

changes spontaneously with revenue

?what levels of ca, cl, s-t loans?

CAPITAL BUDGETING

?which projects to accept?

FINANCING

?how much debt capacity? COST OF DEBT K-WACC

Stockholder's equity (Net worth)

Preferred stock

Common stock

Retained earnings OPERATING LEVERAGE

FINANCIAL LEVERAGE

Total assets Total liabilities &amp; equity COST OF EQUITY

VALUATION

CASH FLOW

COST OF CAPITAL in thousands

Sales

CGS

GM

Operating Expenses

Depreciation

EBITDA

2005

20,041

7,547

12,494 MD PT

COMBINED

2005

2005

17,726

37,767

7,093

14,640

10,633

23,127 3,137

378

9,357

1,359

10,716 5,883

308

4,750

1,500

6,250 9,020

686

14,107

2,859

16,966 Assets

Cash

A/R

Prepaid expenses

Total Current Assets 1,342

5,916

129

7,387 653

4,239

104

4,996 1,995

10,155

233

12,383 PPE - net

Other assets

Total Assets 1,677

456

9,520 1,538

108

6,642 3,215

564

16,162 527

200

226

953 919

264

0

1,183 1,446

464

226

2,136 Long-Term Liabilities

LTD

Total Liabilities 597

1,550 1,047

2,230 1,644

3,780 Shareholder's Equity

Total Equity 7,970 4,412 12,382 Total Liabilities &amp; Shareholder's Equity 9,520 6,642 16,162 Liabilities &amp; Shareholder's Equity

Current Liabilities

Accrued expenses

Accounts payable

Current portion of LTD

Total Current Liabilities Q1-Cost of Capital A

1

2

3

4

5

6

7

8 B C D E F G COMPUTE WEIGHTED AVERAGE COST OF CAPITAL

FIND INPUT DATA ON PAGE 7 OF CASE

Formula

Equation BASIC:

COST OF DEBT:

Coupon Rate

Marginal Tax Rate

Cost of Debt

weight of debt 0.00% given

0.0% given

0.00% b5*(1-b6)

0% COST OF EQUITY:

Risk-Free Rate

Beta

Cost of Equity

weight of equity 0.00% given

0.00% given

0.00 given

0.00% b11+(b13*b12)

100% 1-b8 Weighted-Average Cost of Capital 0.00% (b8*b7)+(b15*b14)(k-d x wt-d)+(k-e x wt-e) k-d = I x (1- t)

d ? d+e 9

10

11

12

13

14

15 R-m - R-f

k-e = R-f + [? x (R-m - R-f)]

e ? d+e 16

17

18

19 Q1-Calculate the cost of capital (k-wacc) for the two acquisition companies combined, as if they are a single company (Column D on Q1 tab)

20 Page 7 of the case has the inputs; supply missing inputs using judgment and what you learned in this course.

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36 Page 6 Q2-Equity Valuation A

1

2

3

4

5

6

7

8

9

10

11

12

13

14 B C FREE-CASH-FLOW VALUATION OF EQUITY

Assumptions:

PERIOD

YEAR

Profit from operations (EBIT)

Income tax rate

Depreciation &amp; amortization expense

Net working capital from balance sheet forecast

Capital expenditures

Long-term growth rate

Wt-Avg. C of C (K-wacc)

Market Value of Debt

Number of Shares

Redundant Assets 0.0%

0.0

0.0

0.0 PERIOD

YEAR 2005

0 D E F G H USE ANSWER BOXES BELOW STARTING AT ROW 68

2005

0 0.0 2006

1

20173.0

35.0%

600.0

2326.0

3600.0 2007

2

23238.0

35.0%

1200.0

2434.0

3600.0 2008

3

26757.0

35.0%

1800.0

2996.0

3600.0 2009

4

30785.0

35.0%

2400.0

3690.0

3600.0 2010

5

30785.0 no growth in 2010

35.0%

2400.0

3690.0

3600.0

0.0% enter this

enter this

not applicable

not applicable 15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33 EBIT after tax (EBIAT)

+ Depreciation

=Cash Flow from Operations (CFFO)

+/- Change in Net Working Capital

+/- Capital Expenditures

=Free Cash Flow (FCF)

+Terminal Value (TV)

=Sum of FCF + TV

Present Value

- Market Value of Debt

= Valuation of Equity

+Redundant assets

/ Number of Shares

Value of Equity per Share 2006

1

13112.5

600.0

13712.5

(2326.0)

(3600.0)

7786.5 2007

2

15104.7

1200.0

16304.7

(108.0)

(3600.0)

12596.7 2008

3

17392.1

1800.0

19192.1

(562.0)

(3600.0)

15030.1 2009

4

20010.3

2400.0

22410.3

(694.0)

(3600.0)

18116.3 2010

5

20010.3

2400.0

22410.3

0.0

(3600.0)

18810.3

#DIV/0!

#DIV/0! 7786.5 12596.7 15030.1 18116.3 Peer C

0.0

3.0

0.0

0.0 Peer D

0.0

3.0

0.0

0.0 Average

Peer E

Mkt Mult

0.0

0.0 do not use

3.0

3.0 use this one

0.0

0.0 do not use

0.0

0.0 do not use #DIV/0!

0.0

#DIV/0!

0.0

#DIV/0!

0.0

#DIV/0! 34

35

36 MARKET MULTIPLES (COMPARABLES) VALUATION OF EQUITY 37

38

39

40

41

42

43

44

45

46

47

48

49

50

51 Market Multiples of Peers

Price /revenue market multiple of peer company

Price/EBITDA market multiple of peer company

Price /Earnings market multiple of peer company

Mkt Val of Eq/Book Val mkt mult of Equity of peer

Target company data

Target company revenue

Target company EBITDA

Target company earnings (net income)

Target company book value of equity

Target company number of shares 52

53

54

55

56

57 Valuation Calculations

Valuation based on avg revenue market multiple

Valuation based on avg EBITDA market multiple

Valuation based on avg earnings market multiple

Valuation based on avg book value market multipl Peer A

0.0

3.0

0.0

0.0 Peer B

0.0

3.0

0.0

0.0 0.0 do not use

0.0 enter the number

0.0 do not use

0.0 do not use

if less than 5

peers from col B from Col G

BxC

C/B55

Target Co Average Aggregate Per Share

Data

Mkt Mult Valuation Valuation

0.0

0.0

0.00

#DIV/0!

0.0

3.0

0.00

#DIV/0!

0.0

0.0

0.00

#DIV/0!

0.0

0.0

0.00

#DIV/0! 58

59 Summary map

60

FREE CASH FLOW MODEL

61

REVENUE MARKET MULTIPLE

62

EBITDA MARKET MULTIPLE

63

EARNINGS MARKET MULTIPLE

64

BOOK VALUE MARKET MULTIPLE

65

66 CURRENT MARKET PRICE

67

68 Q2-Complete the FCF Valuation and the Market Multiples Valuation. Some data is entered for you; some you must enter.

69 The yellow-shaded cells guide you. Data is for Ohio and Maryland PT companies combined, as if they are a single company.

70

71 Explain what your analysis tells you in this box.

72

73

74

75

76

77

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79

80

81

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84

85

86

87

88

89

90

91

92

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96

97

98

99 Page 7 I J K L A B C D E F G H I J K L M FINANCING (DEBT-EQUITY) DECISION

USE ANSWER BOXES BELOW STARTING AT ROW 72

Inputs:

3 External Financing Needed

0 from forecast

4 Existing Common Shares

0 from company info

5 Existing Long-Term Debt

0 from most recent historical balance sheet

6 Interest Rate on Existing Debt

0.0% from company info

7 Interest Rate on New Debt

0.0% given

8 Boom EBIT

0 arbitrarily above optimistic forecast

9 Bust EBIT

0 arbitrarily below pessimistic forecast

10 Income Tax Rate

0.0% from income statement

11 Share Price

\$

- from market info

12 Equity

0 from most recent historical balance sheet

1

2 13

14 Results: IF DEBT IS USED

IF EQUITY IS USED

BOOM

BUST

BOOM

BUST

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

0

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0! 15

16

17

18

19

20

21

22

23

24

25 EBIT

Interest expense - old

Interest expense - new

Profit before tax

Income tax

Net profit

Shares

Shares - new

Earnings per share

Coverage ratio 26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41 EBIT CHART

\$12.00

\$10.00

\$8.00

EPS

\$6.00

\$4.00

\$2.00 debt EPS \$0.00

0 0

EBIT 42 EBIT

debt EPS

equity EPS 43

44

45 0

#DIV/0!

#DIV/0! 0

#DIV/0!

#DIV/0! 46

47

48 Indifference point calculation:

Debt 49 Common shares

Income tax rate

Interest expense 0

0.0%

0 EBIT

Interest expense

EBT

Income tax

EAT

59 EPS #DIV/0!

0

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0! 50

51

52

53

54

55

56

57

58 Equity

#DIV/0!

0.0%

0

#DIV/0! Indifference EBIT

0

#DIV/0!

#DIV/0!

#DIV/0!

#DIV/0! Indifference EPS 60

61

62 Debt capacity calculation:

Bust 63

64

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68

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70

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72

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77

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79

80

81

82

83

84

85

86

87

88

89

90

91

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94

95

96

97 EBIT

Interest coverage ratio per ratin

AVAILABLE FOR INTEREST

Interest rate

DEBT CAPACITY

Existing debt

EXCESS DEBT CAPACITY 0

0

#DIV/0!

0.0%

#DIV/0!

0

#DIV/0! Boom

0

0

#DIV/0!

0.0%

#DIV/0!

0

#DIV/0! Indiff.

#DIV/0!

0 BBB rating chosen

#DIV/0!

0.0%

Credit rating

#DIV/0!

Interest coverage ratio

0

Debt ratio - approximate

#DIV/0! AAA

27.3

12.6% Q3-Calculate the debt capacity of the combined PT companies (see Financial Statements tab). Disregard the yellow-shaded

panels on the Q3 tab - use only the debt capacity panel. Explain how much additional debt can be borrowed

Answer in this box. AA A

BBB

BB

B

CCC

18

10.4

5.9

3.4

1.5

0.5

36.1% 38.4% 43.7% 51.9% 74.9% 100.6% Q4-Answers here pull together the analysis you did for Q1, Q2 and Q3.

a Write a short statement describing the 'business risk' of the physical therapy business?

?including pros and cons?from the viewpoint of growth and stability of revenue and EBITDA. b The case tells you that the 'buyer's side' valuation uses an EBITDA multiple of 3x and a 'seller's side' valuation

uses an EBITDA multiple of 8x. The market multiples analysis in Q2 used 3x. Do a sensitivity analysis

using 8x and cite the range of values you get with market multiples compared to the valuation with

FCF. For Q4b, only cite the results. You will render your recommendation later, in Q4c. c Considering your answers to Q4a and Q4b above, recommend the price that should be offered by ACE to buy

combined PT companies. Use metrics you calculated and those in the case (hard data) as well as other case

information (soft data) to justify your recommendation. d Given the price you recommended in Q4c and the debt capacity you calculated in Q3, and knowing that

the policy of ACE is to borrow 50% of the price they pay, is the debt capacity high enough to provide the mone

they need? Explain fully. e Suppose ACE sells the combined PT companies exactly two years after buying it. The sales price is 50% high

than the valuation you recommended in Q4c. Calculate the rate of return ACE will have earned on its

investment. HINT: Use IRR and don't forget how they financed the purchase. f Based on what you learned about LBOs in the LBO Overview and LBO Video, and what you learned about Pr

explain why you think Aaron Brown's deal is or is not a leveraged buyout. g Considering the structure of this deal and its potential rate of return, explain why you think it is either fair or un

public policy standpoint, should private equity deals be subject to an 'excess rate of return' tax? Why or why n y business?

tability of revenue and EBITDA. of 3x and a 'seller's side' valuation

x. Do a sensitivity analysis

ed to the valuation with at should be offered by ACE to buy the

(hard data) as well as other case ated in Q3, and knowing that

y high enough to provide the money ying it. The sales price is 50% higher

CE will have earned on its eo, and what you learned about Private Equity in the Surowiecki article, why you think it is either fair or unfair. From a

s rate of return' tax? Why or why not?

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