Harley-Davidson Inc. produces motorcycles, motorcycle parts and related accessor

Question

Harley-Davidson Inc. produces motorcycles, motorcycle parts and related accessories and merchandise in the United States and internationally. It is headquartered in Milwaukee, Wisconsin. Use the following information on Harley-Davidson and five other similar companies to value Harley-Davidson as of December 31, 2004.

*These companies have little or no interest-bearing debt outstanding

Net income 889.77 Number of common shares, millions 294.31 Earnings before interest and tax $1,506.16 Tax rate 35.0% Book value of equity $3,218.47 Book value interest-bearing debt $1,295.44 Total Sales $5,320.45 Total Assets $5,483.29

Explanation / Answer

Valuation of companies is relevant for various aspects of financing world like:

1. Merger and Amalgamation

2. For the purposes of listing on stok exchanges

3. To show the shareholders value added

4. For the purposes of Employee's Stock Option Plans

There are many ways of calculating the value of the equity which are enumerated below:

1. On the basis of stock value on stock exchange if listed

2. On the basis of discounted free cash flow method

3. On the basis of dividend earning capacity method

4. On the basis of capitalization method

5. On the basis of total asset less total outside liabilites.

With value of equity and value of debt total value of the business = Value of Equity + Value of Debt

Under this question value of equityHarley Davidson can be calculated using following methods:

1. Earning Capitalization method = Net Income / Growth rate

2. Net Asset Method = Total Assets - Total liabilites (outside)

(a) Therefore using above formulas we get value of equity:

1. On the basis of earning capitalization method = $ 889,770,000 / 28.1% = $ 3,166,441,281

2. On the basis of Net Asset Method = $ 5,483,290,000 - 40% * $ 5,483,290,000 ( As total outside liability is 40% of total assets) = $ 3,289,974,000

(b) Value of Debt = Total Debt * ( 1 - Tax)

= $ 1,295,440,000 * ( 1 - 0.35) = $ 8,420,360,000

Hence

Total Value of Firm:

1. On the basis of earning capitalization method = $ 3,166,441,281 + $ 8,420,360,000 = $ 11,586,801,281

2. On the basis of net asset method = $ 3,289,974,000 + $ 8,420,360,000 = $ 11,710,334,000

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