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Lockheed Martin’s Acquisition of NationScape Inc Case Solution & Answer

Lockheed Martin’s Acquisition of NationScape Inc. Case Solution

WACC
Ve 36%
Vd 64%
Vt 1
Kd 5.63%
Ke Risk free rate+Ba(Rm-Rf)
Risk free T bond 4.60%
Beta 1.28
Rm 8%
Ke 8.3%
Tax rate 37%
WACC 5.27%

 WACC calculated is 5.27%. The cost of equity is calculated using the CAPM model. While for cost of debt the interest rate is assumed to be paid only on the bank notes, thus average interest rate is derived, see excel. Tax rate was also estimated using average tax rates based on the given data. Market risk premium is assumed to be 7.5%. Beta is calculated by using the comparable companies’ data, and by taking the average beta for the industry.

For FCFF, EBIT is taken for the related years and then tax adjustments are made. Depreciation is added back since it will not affect the cash flows, as depreciation is  a non-cash item. Capital Expenditure and working capital are calculated by projections made for relevant years. For projection, purpose rates are calculated by using revenue as base. Both CAPEX and changes in working capital are then adjusted to give FCFF. Terminal value is calculated using the assumed growth rate of 1%. Thus, NPV is calculated as $1.88 billion.

Year       2005 2006 2007 2008
EBIT       70827 83793 100939 128289
Tax rate 37%            
PAT       44863.5 83793 100939 128289
Accumulated Dep& Amortization   2345 2020 2020 2020
Capital Expenditure     11511 23259 27629 34549
Working Capital       125625 63266 75153 93975
Change in WC         -62359 11886 18822
Cash Flow       35698 124913 63444 76938
TV             1913924.54
FCF       35698 124913 63444 1990863
NPV
Yr   2005 2006 2007 2008
FCF   35698 124913 63444 1990863
WACC 5.27%        
Growth 1%        
NPV $1,882,587        

 What is the value of NSI using multiples valuation?

For calculating the value of NSI using information of comparable comanies, the EBIT multiple and EBITDA multiple are used. The comparable companies are all in the same industry and there were different companies with different values, and sizes, thus the comparable information contains mixed and concise information. For better computation, average multiples are used for EBIT and EBITDA. By multiplying values from given information about NSI with average multiples, the firm’s value is calculated.

        Comparable Companies
Multiples       Average
EBITDA       9.3
EBIT       9.8
NSI Valuation      
      Multiples Fair value
EBITDA 72446   9.3 673747.8
EBIT 70827   9.8 694104.6

Since comparable data is mixed, it includes companies without any standard information, such as various sizes of companies, with different values of revenues, fixed assets, equity, and debt, comparable are used. Therefore, the value of the firm calculated using the given data is not reliable. The value as per EBITDA is calculated to be $673 million and as per EBIT it is $694 million.

 What price should Lockheed Martin offer for NSI if it decides to proceed with the acquisition?

Lockheed Martin got different values from different valuation models, namely DCF and comparables. To offer the best price, Lockheed can use average of such prices. The average value is calculated to be $1.08 billion. The Company should bear in mind various other non-quantitative benefits as well as synergy it will obtain by this acquisition. NSI has great growth potential as well as has customer case and an impressive geographical existence, which will bring more business. All these factors should be considered and incorporated in the deal to offer the price for acquisition.

Valuation Methods     Value
DCF        $        1,882,587
EBITDA MULTIPLE      $            673,748
EBIT MULTIPLE      $            694,105
Average Value      $        1,083,480
 

 

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