Gulf Oil Corporation-Takeover Case Solution
Introduction
The report contains an analysis of Gulf Oil Company’s protest and an effort by the Usual Oil Company of California (Socal). The base price per share is set at a premium of price of $70 share, evaluating the general price increase per company share. The order process was the result of Mesa Petroleum Company’s forced capture when its manager Boone Pickens gave part of the company’s shares.
This report includes a productive analysis of Gulf study and development value which are the biggest reasons behind the firm’s large oil disclose. It also provides an analysis of the element that have led to a remarkable increase in the Gulf’s value in such a small amount of time. Additionally, the report also includes a review of Boone Pickens’ great show and the establishment of key receiver of potential purchase. It offers a long-term value to the Gulf Oil Company and the establishment of efficiently organized prices.
Problem Statement
With a $ 70 offer price per share of Gulf per share than its market cost of $ 43, Communist George Keller shows some worries about what a fair price might be provided to avoid being taken over by the competitors. ARCO and to neglect any surplus of the firm. In addition, Keller is also worried about the huge increase in the investment rate after the purchase of a rate, which has to be paid after a few years.
- Costs of debtis the essential interest rate that a firm pays on its debts. Credit value usually refer to the before tax expense of the debt, which is the firm’s cost before tax, in which, we have taken yield on AA corporate bonds as the cost of debt of 13.5%. Weight of Debt is calculated as current market value of debt divided by the total market value of debt and equity. Weight of Equity was calculated as the current market value of equity divided by the total market value.
Tax rate was assumed as 50%. The risk–free rate tells the returns a financier would get from a completely free of risk investment was taken as 11% of yield of Government term bond. Market return was calculated as Between1973-1982 as the center of (S&P 500) capital index which is 14.5%. Gulf Corp’s beta was taken as 1.15 from the online source. And lastly it’s cost of equity was calculated by first adding the risk free rate and beta and subtracting market return and risk free rate and then multiplying both the answer we got the cost of equity which is 15.025%. And finally after all these calculation we found out the WACC of Gulf Corp to be 14.11%.
Gulf Valuation – Perpetuity | |
Assumptions | |
Tax Rate | 50% |
Nominal Growth Rate | 4% |
WACC | 14% |
FCFF Calculation | |
Revenues | 6503 |
Less: Costs | |
Production | 911 |
Wellhead taxes | 792 |
Depreciation Expense | 1000 |
Other operating Expenses | 351 |
EBIT | 3449 |
EBIT*(1-Tax) | 1725 |
Add: Depreciation | 1000 |
Free Cash Flow | 2725 |
Enterprise Value (perpetuity) | 26936 |
Valuation – E&D Program | |
Value of Exploration and Development Program | 19886 |
Total Enterprise Value | 46821 |
Less Debt | 10836 |
Equity Value | 35985 |
No. of Outstanding Shares | 165.3 |
Value per share | 218 |
Price offered | 70 |
discount (Premium) on shares | 148 |
Rate of Return | 68% |
In free cash flow calculation we assumed the nominal growth rate which is 4%. And after that for the Enterprise Value (Perpetuity) approach. The revenue of the Gulf Company was 6503, by subtracting all the expenses and cost production, wellhead, depreciation and other operating expenses, the EBIT is calculated as 3449. And for the free cash flow multiplying EBIT with the Tax Rate and add depreciation the free cash flow that we calculated was 2725. And Enterprise Value (Perpetuity was calculated as free cash flow/ (WACC- Nominal Growth Rate). Which was calculated as 26936.
And In Valuation of – E&D Program was calculated as Enterprise value (perpetuity) + Value of Exploration and Development Program = 46821. And Equity value was calculated as total enterprise value – debts = 35985. No of outstanding shares were 165.3, and value per share was calculated as Equity value / no of shares= 173, as they are offering at 70 per share and the value of the share is 218, and that is why the shares are at premium. And investors would be getting 68% return.
3)
Gulf Valuation – Perpetuity | |
Assumptions | |
Tax Rate | 50% |
Nominal Growth Rate | 4% |
WACC | 14% |
FCFF Calculation | |
Revenues | 6503 |
Less: Costs | |
Production | 911 |
Wellhead taxes | 792 |
Depreciation Expense | 1000 |
Other operating Expenses | 351 |
EBIT | 3449 |
EBIT*(1-Tax) | 1725 |
Add: Depreciation | 1000 |
Free Cash Flow | 2725 |
Enterprise Value (perpetuity) | 26936 |
Less Debt | 10836 |
Equity Value | 10836 |
No. of Outstanding Shares | 165.3 |
Value per share | 66 |
Price offered | 70 |
discount (Premium) on shares | -4 |
Rate of Return | -7% |
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