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[answered] Case PRIVATE EQUITY CASE: MERGER CONSOLIDATION The questions below COMBINE the Ohio & 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 & 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

 

a recommendation about its value.

 

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

 

based on your analysis.

 

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 & B/S FORECAST

 

TIE

 

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

 

STOCK PRICE

 

MKT CAP

 

EXTENDED ANALYSIS

 

FULL RATIOS

 

LIQUIDITY

 

LEVERAGE

 

ASSET USE

 

PROFITABILITY

 

VALUATION

 

GROWTH

 

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

 

1-HISTORICAL RATIOS

 

2-K-WACC

 

3-CAPITAL BUDGETING

 

4-FORECAST & 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

 

Trade payables

 

Investments

 

Other accruals

 

Trade receivables

 

Tax liabilities

 

Inventories

 

Short-term loans, leases

 

Non-current assets

 

Non-current liabilities

 

Property, plant & 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

 

Additional paid-in-capital

 

Retained earnings OPERATING LEVERAGE

 

FINANCIAL LEVERAGE

 

Total assets Total liabilities & equity COST OF EQUITY

 

VALUATION

 

CASH FLOW

 

COST OF CAPITAL in thousands

 

Sales

 

CGS

 

GM

 

Operating Expenses

 

Depreciation

 

EBITDA

 

Adjustments

 

Adjusted EBITDA OHIO PT

 

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 & Shareholder's Equity 9,520 6,642 16,162 Liabilities & 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

 

Equity Risk Premium

 

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.

 

21 Explain your anaysis in this answer box.

 

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 & 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

 

=Adjusted Value of Equity

 

/ 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

 

0.0 not applicable adjust function

 

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

 

78

 

79

 

80

 

81

 

82

 

83

 

84

 

85

 

86

 

87

 

88

 

89

 

90

 

91

 

92

 

93

 

94

 

95

 

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

 

disregard yellow-shaded rows, per instructions

 

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

 

65

 

66

 

67

 

68

 

69

 

70

 

71

 

72

 

73

 

74

 

75

 

76

 

77

 

78

 

79

 

80

 

81

 

82

 

83

 

84

 

85

 

86

 

87

 

88

 

89

 

90

 

91

 

92

 

93

 

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

 

based on your analysis.

 

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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