Mergers and Acquisitions – The Relentless Pursuit of Synergy

Week 5 Assignment :

PROMPT

A. Extracting Model Inputs

the proper NOI to be used as a basis for valuation =402 the average tax rate=39.47 total assets and investments for each year=216 after-tax profitability rates for each year and the average rate r=3.754 Calculate investment rates and the average rate b=0.162 the average growth rate g=10.53 supporting values 1 + h = (1 + g)/(1 + WACC) and (1 + h)n=0.9588

PROMPT

B. Building the Valuation Model

The total value of the Company = \$2,955 million Subtracting total debt (\$367 million in 1991) we get the equity value of the Company of \$2,588 million Dividing by 137 million shares, we finally get the model stock price for 1991 of \$18.9.

PROMPT

C. Studying the Valuation Sensitivity

Investment ratio b (+/- 20% at a step of 10%) Profitability rate r (+/- 20% at a step of 10%) WACC (+/- 20% at a step of 10%) Length of the period of supernormal growth n (5 to 15 years, at a step of 2.5 years)

PROMPT

D. Other Remarks and Conclusions

The model is most sensitive to WACC; the value depends on WACC in a non-linear way. That is linked to the expected investors’ return expectations