Cape Chemical

TIPs for Student Cases – FIN 4422, Fall 2016

In every case, always ask yourself: “What are the risk factors?”

Cape Chemicals

• Do cash flow forecasts for 2008-2011
• Inflation rate = 0.02
• Ce for 2008 is given as $1.2 million; shortage inventory given as $0.8 million
• Sales target for 2008 is $78 million
• Assume principal payments are 10% of previous gross debt & interest rate =0.11
• Ignore section called “The Task”

Strong Tie Ltd

• Do cash flow forecasts for 2009-2012
• Inflation rate = 0.02
• Note the restatement of balance sheets in EXCEL financials
• to find c-factor, modify method where c = Ce ÷ (0.25*S); assume that the capacity increase will be sufficient until another investment is made in 2012 for positive growth cases
• Don’t get hung up on the restrictive covenants in the paragraph called “FINANCING;” STL has more important problems

Boston Beer

• The IPO is for only 20.8% of the total equity value
• Do valuation of several scenarios, finding the amount raised by an IPO
• Do not be sidetracked by potential price per share; before the IPO, BB can change the number of shares by split or reverse split
• Remember that IPOs suffer about a 20% underpricing and 7.5% flotation cost --  both reduce the proceeds of the issuance
• In determining the discount rate for the present values, consider the data from similar traded companies
• Inflation rate = 0.04

Continental Carriers

• Your numerical analysis should be along the lines of Tables 9.2-9.3
• A good scenario format is: [a] one optimistic operating scenario with CATO per share under SEO, and then under debt, and then under convertible exercised plus [b] one pessimistic operating scenario with CATO per share under SEO, and then under debt, and then under convertible with no exercise.
• Use the supplemental financial statements provided by your beloved professor
• Replace the nonsense about a preferred stock issuance with a potential convertible debt issuance at 7.5% coupon.  Each $1,000 bond would have a conversion ratio of 42 shares.  Principal payment, if needed, would be a balloon in 15 years.  The first possible call would be in year 1 at a call price of $1075 — the call premium decreases by $5 per year.
• What is the primary source of “dilution” in the common stock financing sub-case?
• For this kind of analysis, set all operating costs as variable
• Inflation rate = 0.05

Ocean Carriers

• NPV analyses of the one new ship
• change the price to $30 million to be made with a downpayment of $3 million, a $3 million payment in year 1 and the remainder in year 2.
• Income tax rate = 0.35
• OCI’s WACC = 0.09. Use this as a required rate of return [that is, a discount rate] for risky cash flows.
• Contractual cash flows are less uncertain.  Their required rate of return is 0.06. The risk-free rate is 0.04.
• Comment on the 15-year life policy.
• Use the 3-discount rate method

Radio One

• NPV analyses of purchasing stations from Clear Channel
• Data in Exhibits 6 & 7 are dollars; data in Exhibit 9 are $1,000s
• Case has conflicting data for non-cash charges; set yours as 1/14 of the purchase price that you determine
• Assume t = 0.41
• Use βasset to find k; add risk premium for potential financial distress [examine your heart]; this substitutes for a WACC
• OK to use continuing value
• OK to use the bottom up method
• Issue: unknown purchase price, and actual non-cash charges will be contingent on purchase price
• Each new station will need start-up transactions cash plus spontaneous wc
• Given specifics of this case, prepaid expenses and accruals are spontaneous
• When you hack a c-factor, based on all fixed assets (tangible and intangible), be ready for a shock

Seagate Technology

• Valuation of new Seagate based on Exhibit 8 [note cash transfer]; you should have another column where the growth rate is low and sustainable
• Work with historical statements to see if new management and strategies can unlock Seagate value; valuation based on this scenario
• Do some quick and dirty numerical work to see how much debt the new Seagate can bear
• Exhibit 8 gives EBITA, which is really EBITDA
• No, EBITA is not EBIT; it’s EBITDA
• you might need to go 2007 for a low, sustainable g and continuing value
• Inflation rate = 0.02
• Again, EBITA is EBITDA

Chang Dental Clinic

• Assume t=0.30
• Use valuation for equity value [no need for price per share]
• Inflation rate = 0.03
• Assume lease obligations have a PV of about $300,000
• WACC for private transactions is always difficult. Look at “Return on Assets” in one of the exhibits
• Check to see if Miller can service his financing

Victoria Chemicals (A)

• the product is a commodity. Think hard about what that means in terms of capacity utilization, tons sold in response to price per ton changes and erosion
• NPV problem — Exhibit 2 calls NPV "DCF"
• The inflation washout assumption is wrong; inflate both selling price and production cost at 2.0%
• convert Exhibit 2 to “format” tab of the “financials”
• decide and discuss which cash flows are truly incremental
• as consultant to management, tell why you include or exclude “overhead” from the NPV [that it’s a company rule is not a good reason]
• gross margin = 13.9% means the profit on a ton sold for $611, for example, is 611*0.139 = 84.93 and the production cost for that ton is 611*(1-0.139) = 526.07; if market price changes, production cost per ton remains £526.07.
• Tank cars would cost £3 million in year 2, depreciated straight line for 5 years
• Risk-free rate = 0.015, for D*t stream for new assets

Victoria Chemicals (B)

• the product is a commodity. Think hard about what that means in terms of capacity utilization, tons sold in response to price per ton changes and erosion
• NPV problem — Exhibit 1 calls NPV "DCF;"
• The inflation washout assumption is wrong; inflate both selling price and production cost at 2.0%; the proper discount rate for risky cash flows is 10%
• convert Exhibit 1 to “format” tab of the “financials” 
• as consultant to management, tell why you include or exclude “overhead” from the NPV [that it’s a company rule is not a good reason]
• is the comparison to case (A) truly valid?
• for comparison purposes, assume that NPV for (A) = £10.45
• gross margin = 11.6% means the profit on a ton sold for $611, for example, is 611*0.116 = 70.88 and the production cost for that ton is 611*(1-0.116) = 540.12; if market price changes, production cost per ton remains £540.12.
• assume the staged capital investment is essentially a contract, discounted at 6%
• Risk-free rate = 0.015, contract rate = 0.06
• Use 3-discount rate method. See “format” tab on “financials” file

Aurora : Douglas Dynamics

• two valuations of Douglas Dynamics with WACC = 12.34%
• estimate the value Aurora should offer for DD
• assume an LOB by Aurora using debt for 80% to 90% of value
• interest rate on junky debt at 9.5%
• two corresponding DD cash flow forecasts
• don’t try to put valuation and CF forecast on the same spreadsheet
• inflation rate = 0.03
• income tax rate = 0.41 [0.35 federal & 0.06 state]
• can Aurora count on DD to service the debt?