It is the end of 2013, and KOC Inc. has just received a buyout offer from a priv
ID: 2729439 • Letter: I
Question
It is the end of 2013, and KOC Inc. has just received a buyout offer from a private equity firm. Upon receiving the offer, KOC’s board set up a special committee to evaluate the offer and to make recommendations about the transaction.
The special committee would like you to estimate the value of KOC based on management forecasts given below. Due to the nature of the transaction, you realize that the Capital Cash Flow (CCF) valuation is the most appropriate method. The valuations are to be done as of the end of 2013. KOC is subject to 37.5% tax rate.
KOC is currently debt free, but the transaction will be financed with term loans of $8.9 billion at an interest rate of 7% and bank debt of $12 billion at an interest rate of 8%. The firm pays interest during the year on its beginning-of-the-year debt balances. The outstanding debt amounts over the next five years are given below. Beyond 2018, you expect that KOC’s outstanding debt will grow with firm value.
Outstanding Debt:
Outstanding debt amounts at the end of
2013
2014
2015
2016
2017
2018
Term Loan
8,900
7,900
6,900
5,900
4,900
3,900
Bank Debt
12,000
10,894
8,892
6,517
3,523
29
Management Projections of EBIT, Depreciation, and Capital Expenditures:
Projected Fiscal Year Ending December 31st
2014
2015
2016
2017
2018
EBIT
5,360
6,537
6,927
7,628
8,123
Depreciation
1,446
1,536
1,632
1,734
1,842
Capital Expenditure
1,560
1,634
1,784
1,904
2,015
Management Projections of Net Working Capital:
2013
(Actual)
2014
2015
2016
2017
2018
Net Working Capital
348
489
584
640
659
679
Market and Interest Rate Data:
Risk-free rate = 4%
Market risk premium = 6%
Long-term growth rate = 3%
Interest rate on term loan = 7%
Interest rate on bank debt = 8%
Tax rate = 37.5%
Information about Comparable Companies:
Company
Equity Beta
Debt Beta
Total Debt ($m)
Market value of equity ($m)
RTH Healthcare
1.7
0.2
5,000
3,000
Health Management Associates
0.8
0.1
2,000
6,000
Community Health Systems
0.9
0.1
3,000
5,000
The enterprise value of KOC is closest to:
$105,965 million
$90,158 million
$60,958 million
$88,267 million
None of the values listed here
Outstanding debt amounts at the end of
2013
2014
2015
2016
2017
2018
Term Loan
8,900
7,900
6,900
5,900
4,900
3,900
Bank Debt
12,000
10,894
8,892
6,517
3,523
29
Explanation / Answer
Interest calculations 2013 2014 2015 2016 2017 2018 Term LoanO/s at the beg. Of the year 8,900 7,900 6,900 5,900 4,900 3,900 Int. @ 7% on Op bal 553 483 413 343 273 Bank Debt 12,000 10,894 8,892 6,517 3,523 29 Int. @ 8% on Op bal 871.52 711.36 521.36 281.84 2.32 Total Interest payments during the Year 1424.52 1194.36 934.36 624.84 275.32 CCF = FCFF + Tax saved from interest = FCFF + Interest*t Where FCFF = EBIT*(1-t) + Depreciation – Capex – Change in NWC Year-wise CCF Calculations 2014 2015 2016 2017 2018 EBIT 3,350 4,086 4,329 4,768 5,077 Add:Depreciation 1,446 1,536 1,632 1,734 1,842 Less:Capital Expenditure 1,560 1,634 1,784 1,904 2,015 Less:Change in NWC 141 95 56 19 20 FCFF 3,095 3,893 4,121 4,579 4,884 Total Interest payments during the Year 1424.52 1194.36 934.36 624.84 275.32 Interest*Tax Rate(37.5% 534.195 447.885 350.385 234.315 103.245 CCF=FCFF+Tax saved due to interest 3,629 4,341 4,472 4,813 4,987 WACC for comparable firmsRTH Healthcare Type of Capital Value Proportion Cost Calculations Cost Prop.* Cost WACC Debt 5000 0.625 0.04+(0.2*0.06) 0.052 0.0325 Equity 3000 0.375 0.04+(1.7*0.06) 0.142 0.05325 Total 8000 1 0.08575 8.58% Health Management Associates Debt 2000 0.25 0.04+(0.1*0.06) 0.046 0.0115 Equity 6000 0.75 0.04+(0.8*0.06) 0.088 0.066 Total 8000 1 0.0775 7.75% Community Health Systems Debt 3000 0.375 0.04+(0.1*0.06) 0.046 0.01725 Equity 5000 0.625 0.04+(0.9*0.06) 0.094 0.05875 Total 8000 1 0.076 7.60% Average WACC for Comparable firms 0.079767 7.98% Year CCF Dicounted @7.98% PV 2014 3629 0.9261 3361 2015 4341 0.85766 3723 2016 4472 0.79427 3552 2017 4813 0.73557 3540 2018 4987 0.68121 3397 2018 103144.7791 0.68121 70263 87837 Terminal CCF=(4987*1.03)/(0.0798-0.03)= 103144.7791 (Long-term growth rate = 3%) So, Enterprise value= 87837 millions is more nearer to $88,267 million
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.