Saskferco products Inc. Case Solution & Answer

Saskferco products Inc. Case Solution

Economic impact on the company

The company has been affected by the economic conditions and forces of demand and supply. Due to high fertilizers prices there is increase in supply of the fertilizer as every company have tried to gain from the higher prices. This brings demand in declining state and thus causes depressed fertilizers prices as demand becomes low and supply become high. The situation changes with time. Since there is increase in population and due to growth in the per capita income, agriculture products gains high demand. Thus the demand for fertilizers increases as well. The prices go up as demand increases. As per estimation this growth statistics will be in a progressive trend and this ensures better future prospect for the company.

Reason for the sale

The government of Saskatchewan has invested in the Saskferco in order to promote agriculture in the province and to provide more jobs to the unemployed population of the province. It also implies this factory to be a large consumer of government natural gas and also a new supplier of fertilizers thus increases competition in the market. The government is in need of fund which it will invest at other projects of public facilitation’s. Since the market condition is favorable for this sale, the government persuades to sell the plant to release its stake from the investment, so that cash flow arising from its sales can be used for other projects.

Discounted Cash Flow Analysis

One method suggested for valuation is the use of discounted cash flows. Through this the expected future cash flows are summarized into a single sum of net present value of the plant. The future cash flows for the firm FCFF was calculated first and then discounted by the weighted average cost of capital WACC.

For this calculation firstly WACC was calculated as per the data given. The capital structure consists of equity and debt finance with 80% and 20% proportion respectively. Firstly cost of equity was calculated through CAPM Capital asset pricing model. This model shows that the cost of equity for the company is 9.6%. The cost of debt was calculated by taking into account risk free rate and spread of 150-basis points over the 10 year government bond. Through calculation this gives figure of 3.7%. Thus through this WACC was calculated by the addition of both along with consideration given to their proportion in the total capital. Thus WACC was calculated as 8.4%.

Cash flows     84.934 56.784 66.476 62.788 42.874 817.7819
NPV       $757.02          

Free cash flows were determined from 2009 to 2013, and terminal value is then calculated for year 2014 and so on. For terminal value growth rate was taken as 3 percent. There was no data given on the depreciation or other items, therefore to get tax deducted amount EBITDA was taken and tax was charged based on this EBITDA. Change in working capital and capital expenditures were adjusted in the cash flows which gives the final value for the total cash flow for the company. Thus NPV was then calculated which is $757.02 million, CDN$.

Precedent transactions Analysis

 Precedent transaction analysis implies that by analyzing the prices paid for acquiring the similar companies by other purchasers can be used for the estimation of the value of company. This uses the multiples of a particular industry. There must be similarity between the companies that are taken for making analysis under precedent transactions. There are also consideration needs to be given to the specific circumstances under which the company was acquired. As per data provided in the case, mean, median are calculated, as well as a range was determined for better comparison with high and low range. (Valuation, 2006)………………….

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