Pinkerton (A) Valuation of Acquisition & Finance Decision Case Solution & Answer

Terminal value

The terminal value is the long term value of the company that company would generate over long period of time which is unspecified term. Since, the terminal value is calculated as (last year cash flow divided by (discount rate – growth rate). For example the last year cash flow of the company is $7.7 million, and it is divided by 9.2% i.e. (14.2%-5%). Indeed, the formula further can be explained as if the last year’s cash flow is 9.2% of the company’s value then what the 100% value of the company is. See Excel Sheet

Similarly, the terminal value is important to be calculated because it is the long-term value of the company that it would generate in the future for long period of time. Indeed, it can be determined that there are many complications that need to be understood in the valuation process of the company. Since, it is also important to assume the going concern which means that company would operate for indefinite time period. Therefore, the terminal value gives the value of the company for the indefinite time period that it would operate.


Value created through the acquisition

The term acquisition refers to the selling of business to another company, and that takeover is referred as acquisition. Indeed, it can be determined that there are many complications, and complexities to understand before valuing the value created by the acquisition. Since, if the CPP acquires the Pinkerton, then it would have added value to its revenues, operational efficiencies, and increased gross income, and net income. Therefore the value can be measured through the free cash flows that company would generate.

Indeed, the company would be able to create value through the acquisition by consolidating the operations of the California Plant Protection (CPP). Because, the company would be able to eliminate the common overhead expenses in the corporate headquarters, redundant office, and support staff as well. However, it can be determined that company would be able to create value by consolidation of the operations. So, it can be measured in the numbers.

Meanwhile, the free cash flows of the company would increase by the $3.1 million after acquisition, and the terminal value of that value created through the acquisition is $21.4 million. However, the present value of the terminal would be around $11 million. Similarly, the overall value that would be created is around the $14.1 million. Indeed, this is the value that could be created by the CPP after the acquisition of the Pinkerton.

On the other hand, the value would also be created through the incremental tax shield due to the interest expense coverage. The overall value that company would be able to create is around $15.9 million. Indeed, this tax shield value is created through allowable deduction such as the mortgage, and interest payment as well. However, company would also be able to get tax shield benefit due to the borrowings it has made.

The valuation of acquisition

The value of the acquisition is $158.1 million…………….

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