Interco Case Solution
The value of the equity of the firm (FTE approach) by utilizing the 12% cost of equity
In order to identify the free cash flows available to equity holders, 12 % discount rate is used as a cost of equity. For the calculation of the firm value to equity holders, terminal value is also calculated by using a terminal growth rate of 5% in both upper and lower scenarios. The value of the firm available to equity holder under high growth limit is $49.7 while the value per share of the company which will be available to equity holders under lower growth limit is $22.
The stock prices are showing seasonal trends, and some segments of the company are not performing well which undervalued the current and projected value of the stocks of the company.
The value of the firm using the WACC approach and utilize a 10% WACC
In order to identify the value of the company, 10% discount rate is used and free cash flows which have been calculated for the next ten years being discounted at the rate of 10%. The terminal value is also calculated for this purpose, and 5% terminal growth rate has been assumed. The value of the company is also calculated by using upper and lower limit growth rates. By discounting the projected free cash flows at 10% under both scenarios, the value of the firm is calculated which is $68.5 under upper limit growth rates and $22.4 at lower limit growth rates.
Justification of a debt value
By taking the difference of firm value to equity value, the value of debt is calculated, and it is calculated under both upper and lower limit growth rates. The percentage of debt ratio under upper limit growth rate is 27.4% while the value of debt under lower growth rate is 7.63%. The value of the debt was 19.3% at the end of the year 1987. Therefore, the projected value of debt under both scenarios is justifying the value of debt which was at the end of the year 1987.
In order to identify the value of the company, multiple valuation methods are also used, and the value of the company is identified under different multiples such as sales multiples, net assets multiples, operating income multiples, net profit multiples and operating cash flow multiples. Multiples for the comparable transactions are available, by taking the averages of each multiple and the values at the end of the year 1988, different values for the company has been calculated which are justifying the valuation performed by the Wasserstein, Perella irrespective of the value of the company which has been calculated under sales multiple and it is $103.
Comparison of the values calculated by the Wasserstein, Perellaâ€™ and by using FCF and Multiple valuation method
The value of the company identified by the Wasserstein, Perella is between $68 to $80+, while the maximum value which is calculated under FCF model is $68.5 and the multiple valuation methods is showing the maximum value of $103 which shows that the valuation performed by the Wasserstein, Perella is also appropriate and it seems that there is no incentive for the Wasserstein, Perella as rejecting the bid offer is a suitable option as City Capital undervalued the Interco’s stocks.
Â Recommendation concerning the $70 offer
The bid offer of $70 is not a suitable offer as it under-valued the company’s stock and accepting this offer will result in dilution of the wealth of the shareholders. The company is performing well, and financial position of the company is also should unless of the Apparel segment. Hence, there is a significant potential for growth, and recent financials of the company are also showing the upward trend which shows that in future the stock of the company will perform better as compared to the historical records. Therefore, it is recommended that the management of the company should not accept the offer of City Capital of $70 as it will result in the dilution of the shareholder’s wealth and it could affect the independence of the company as well…………………..
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