NANTUCKET NECTAR: THE EXIT Case Solution
DCF method is commonly used to evaluate the value of the company even though there are other ways of valuing the company like multiples valuation and transaction comparable, but however, DCF is regarded the better model because it takes into account the future cash flows of the company. Nonetheless, the valuation is dependent on the quality of projections, if the projections are overstated the value of the company will be higher due to which the acquirer might hesitate to do the valuation on the projections that the target company has provided and might go for the due diligence report before making the final offer.
The value of Nantucket Nectar at the end of year is calculated through the DCF method;the calculation is done by taking the EBIT and adding the depreciation and subtracting the calculated net working capital and thenet capital expenditure. The free cash flows are calculated through four different costs of capitals; 12 per cent, 14 per cent, 16 per cent and 18 per cent as shown in the exhibits. The value of the company with these costs of capitals isdifferent because higher cost of capital means lower PV of the future cash flows, which results in decreasing cash flows. The growth rate for calculating the value of company is 4%. The value of the company with 12% discount rate is $17.14 million. The value of the company with the discount rate of 14% is $19.4 million. The value of the company with the discount rate of 16% is $13.14 million and the value of the company with the discount rate of 18% is $10.7 million.
Different discount rates have been used to evaluate the value of the company for all types of acquiring companies, which are interested in buying Nantucket Nectar. Companies with a higher discount rate will value the company at lower level; however the companies with lower discount rate will have a higher value of the company. The main reason behind this is that the companies with higher hurdle rate would evaluate the value of the target company to achieve the target of return they have set for the company.
Decision to Sell the Company:
The founders of the company have to decide if it is the right time to sell the company. Tom Scott and Tom First both believe in the upside potential of the company however, they are also concerned about holding the stock of the different company. The owners started the business with $17000 of savings. The current value of the company is around $17 million, which shows the return that will be generated by the owners on selling the company.
The owners should sell the company but should remain in the management of the company. If any big company like Coca Cola acquires Nantucket, then the owners will have enough capital to run the company successfully and increase the value of the company and realize the potential of Nantucket Nectars, which is difficult at the time as the company is unable to increase the share due to different monopolies in the market.
The company is finding it difficult to get the shelf space in big stores which will be solved if the company is acquired by one of the potential buyers. It is also facing problems to get the materials due to the bargaining power of the competitors, which will also be solved. The current employees of the company who have worked hard in building the success for the company and expanding it should be also be retained by the acquirer so they are not disheartened by the sale of the company…………….
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