Suppose you are an analyst asked to prepare a valuation of Yeats Valves and Controls (YVC) for Kate Porter. She has asked you to estimate the appropriate cost of capital (as needed) and per-share value of YVC three ways:
1. Valuation A: Use a discounted cash flow (DCF) analysis and the forecasts in Exhibit 3 to value YVC „as is?. Assume cash flows after 2004 grow at 3% annually.
2. Valuation B: Now assume TSE acquires YVC with the following assumptions:
i. TSE maintains its current capital structure indefinitely. Assume TSE?s debt is currently rated Aa (ignore the Baa rating shown on page 4 of the case).
ii. Synergies will cause EBIT to be 10% higher each year than the Exhibit 3 forecasts.
iii. Cash flows will grow 5% annually forever after 2004.
3. Valuation C: Using a multiples analysis (Porter feels P/E and MV/BV [Price/Book] are the only reliable multiples).
In addition to the information provided in the case, please assume the following:
- You are being asked to conduct this analysis on May 2, 2000, and you should use the most current data available for your analysis. To simplify your analysis, include the full-year 2000 forecast and discount cash flows back to 12/31/99.
- "Other income, net" is not part of operating profit.
- "Working capital needs" in Exhibit 3 are the NWC balances. Assume NWC includes Accounts Receivable, Inventories, and all Current Liabilities.
Prepare a memo to Kate Porter describing your analysis and how she should interpret it, specifically addressing the following:
4. What is the minimum price YVC should accept from TSE?
5. If you were advising TSE, what is the maximum price they should offer for YVC?
6. How would you explain the differences between your valuation results (A, B, and C)?
Attachment:- Assignment.rar