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DRESSEN CASE STUDY Case Solution & Answer

DRESSEN CASE STUDY  Case Solution

As in this case if the company do not earn profit in any year, it is then required to sell off all its assets to service its debt, which creates the strong threat for its solvency.

  1. Are you comfortable with management’s financial forecasts? Why?

The company has forecasted quite a favourable condition for the next five years regarding its cost of goods sold, selling, general as well as administrative expenses and the operating profit. Due to the presence of the suitable administrative infrastructure as well as the presence of turnaround plan of Mr. John Lynch, the forecast is accurate. Moreover, it can also result in the easy repayment of debt which has been taken by the Westinghouse management.

  1. How do you assess whether a buyout business plan (or a project) is credible / achievable?

In order to address the issue of credibility as well as the achievability of the proposed buyout business plan, its return from the overall investment is assessed. If it is generating enough revenues in order to service its debt which has been taken, then it is favourable for the company as a whole.

It can be seen that the high portion of debt is used in this buyout which creates a doubt that whether this could be achievable or not. Due to its risky nature, the debt should not be used in this high proportion. Moreover, by using the appropriate discount rate, the enterprise value should be evaluated using the discounted cash flow technique.

  1. Which variables of the financial statement look critical to Dressen?

The first and the foremost critical value in Dressen financial statement is its high usage of debt to equity in its capital structure that can create significant threat for the overall value of the company. Moreover, the company is not efficiently utilizing its asset as it can be revealed through its asset management of the five year trend. Another factor which is critical in the financial statement of Dressen is the inability of cutting the cost of the company to generate more profits.

  1. If you were the CEO of Warburg Pincus Venture would you go ahead with acquisition of Dressen for $ 565 million? And if you were Paul Jordan would you sell for that bid?

By using the discounted cash flow technique to value the company using its future prospects, it can be seen that the company has a much a higher value as compared with the $ 565 million. By looking it from the Warburg Pincus Venture prospects, the deal is very viable whereas, it is not in the favour of Paul Jordan to sell for this bid of $ 565 million as the company is in a better position to earn more revenues in the future which can significantly result in higher profits for the company which can significantly enhance the value of the company in the future.

  1. Provide possible IRR to Warburg investment estimate for the deal in three different scenarios: upside, management forecasts, downside

Using three different scenarios of upside, downside as well as management forecast, the value of Internal Rate of Return for the company is calculated as follows:

Upside

Some assumptions are changed which include the following:

  1. Under the supervision of Mr. John Lynch and its turnaround plan for the future, the annual sales growth of the company is taken as 10.3% from 1996-1999 and for the year 2000 to infinity the annual growth rate is 6%.
  2. The company under the strong leadership can benefit from cutting the cost of goods sold whose proportion to sales in the year 1996 would be 64% which continue to decrease in the subsequent years.
  3. Collection period of the company would be enhanced to 63 days in the year 1996 to 60 days in the year 1999 to infinity.
  4. The hurdle rate or the discount rate for the company is taken to be 10% with the weight of equity 22% and the weight of debt 78% as also provided in the case.
  5. The estimate of EBITDA multiple is taken to be 7.8 times……..                            This is just a sample partial work. Please place the order on the website to get your own originally done case solution

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