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Submitted By NOPLAT

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2. Financial comparison between Loewen and SCI from 1996 to 1998: a. Gross Margin – While SCI enjoyed stable gross margins ranging from 31.08% to 30.58% from the period of 1996 to 1998, while Loewen’s gross margins over the same period declined from 36.54% to 25.68%, reduction to GM of 29.72% (see Financial Comparison Table below). Both companies shared the strategy of growing through acquisition, however SCI focused more on owning acquisitions outright and seemed to realize operational efficiencies and shared fixed costs demonstrated by their consistent GM. Loewen took a less invasive approach and almost requiring original management to remain in place for certain time period post acquisition and did not benefit as much as SCI from any economies of scale. Another key factor contributing to the gross margin variance is the strong focus SCI took on marketing toward higher front end margin Pre-Need business capturing $3.70B (7.40% to 18.5% Market Share) versus Loewen’s $0.41B (0.82% to 2.05% Market Share) by the end of 1998. (see Financial Comparison Table…...

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...(subject to the important constraints that this is done in a legal, ethical, and socially responsible manner). The two main drivers of enterprise valuation are return on invested capital (ROIC) and the growth rate of profits, g.53 ROIC is defined as net operating profits less adjusted taxes (NOPLAT) over the invested capital of the enterprise (IC), where IC is the sum of the company’s equity and debt (the method for calculating adjusted taxes need not concern us here). That is: ROIC NOPLAT/IC Where NOPLAT revenues cost of goods sold operating expenses depreciation charges adjusted taxes IC value of shareholders’ equity value of debt The growth rate of profits, g, can be defined as the percentage increase in net operating profits (NOPLAT) over a given time period. More precisely: g [(NOPLATt+1 NOPLATt)/NOPLATt] 100 Note that if NOPLAT is increasing over time, earnings per share will also increase so long as (a) the number of shares stays constant, or (b) the number of shares outstanding increases more slowly than NOPLAT. The valuation of a company can be calculated using discounted cash flow analysis and applying it to future expected free cash flows (free cash flow in a period is defined as NOPLAT net investments). TA B L E A 1 It can be shown that the valuation of a company so calculated is related to the company’s weighted average cost of capital (WACC), which is the cost of the equity and debt that the firm uses to finance its business, and the company’s ROIC.......

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...and treasury stock.” In this case you are assuming that the excess cash is used in a share repurchase program. (c) Neither dividend payments nor share repurchases affect the value of the firm (unless there is a signaling effect) because both are ways of delivering value—not creating value. 138 Copeland/Shastri/Weston • Financial Theory and Corporate Policy, Fourth Edition 3. Table S14.3a provides the calculations of the multiples and Table S14.3b compares the forecast Table S14.3a Multiple Calculations Entity Value EBIT Multiple Table S14.3b 2000 $128.91 3.71 34.8 Assumptions Perpetuity Assumptions g r 5%/year 30% 2010 $194.80 10.44 18.7 Averages for 2000–2010 NOPLAT Growth ROIC 12.1%/year 34.4% assumptions during 2000–2010 with those of the perpetuity (years 11 and on). Note that the NOPLAT growth rate is 12.1% during the explicit forecast, but more than halves from then to infinity. The ROIC also comes down—but it is assumed to remain well above the cost of capital. These assumptions are consistent with a multiple that declines from 34.8 in 2000 to 18.7 in 2010. 4. (a) Equation 14.21 is the finite supernormal growth model: V0 = EBIT1 (1 − Tc ) r − WACC + Tc B + K[EBIT1 (1 − Tc )]N ku WACC(1 + WACC) (14.21) Substituting in the suggested parameters, we get an estimate of continuing value as of year 10 V0 = 4,000(1 − .33) .52(1 − .33) − .083 + .33(6,000) + .15[4,000(1 − .33)] + 10 .0845 .083(1.083) .265 = 31,716 + 2,000 + 4.020...

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...sales, largely by increasing its asset efficiency and profitability. 3- As a measure of financial performance calculated as operating cash flow minus capital expenditures. Free cash flow (FCF) represents the cash that a company is able to generate after laying out the money required to maintain or expand its asset base. Without cash, it's tough to develop new products, make acquisitions, pay dividends and reduce debt. FCF is calculated as EBIT(1-Tax Rate) + Depreciation & Amortization - Change in Net Working Capital - Capital Expenditure. In the case, FCF shows the NOPLAT; OWC; PP&E increase in the same way of Op. assets and Op. Liabilities. As a result Dell`s Working Capital increase 82,47% releasing capital to stockholders, R&D and replace the short term investiments to long term one. | | | | | | | | Free Cash Flows | | | | | | | | 1996 | 1995 | | NOPLAT | | | | 377 | 249 | | Depreciation | | | | | | Gross Cash Flow | | | 377 | 249 | | Operating Working Capital | | -193 | -58 | | PP&E | | | | -67 | -32 | | Free Cash Flow | | | 117 | 159 | | | | | | | | | | | | | 1996 | 1995 | 1994 | Operating Assets | | | 1366 | 986 | 714 | Operating Liabilities | | | 939 | 752 | 538 | Working Capital | | | 427 | 234 | 176 | Attachment Ratios | | 1996 | 1995 | 1994 | Return Assets | 12,7% | 9,3% | -3,2% | Return Equity | 28,0% | 22,9% |......

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...Elementos Peso Custo Equity 60% 8% Debt 40% 6% t 25% WACC = 0,6 (1 – 0,25) __0,4___ + 0,8 __0,6___ = 0,66 (6,6 %) (0,4+0,6) (0,4+0,6) Efeito fiscal Ex. Estrutura financeira da empresa Elementos Valor/ % Aumento do endividamento EBIT 100 100 Enc. Fin. 50 60 +10 EBT 50 40 Imp.s/ luc.(25%) (12,5%) (10%) Net Income 37,5 30 (7,5) Efeito fiscal – benefício fiscal a empresa endividou-se apenas +10, mas perdeu apenas (7,5). Logo no cálculo do WACC (e outros indicadores) deve-se utilizar o (1- t). 1.5. NOPLAT (Net Operating Profit Less Adjusted Taxes) Resultados independentemente do financiamento, i.e. os resultados caso a empresa fosse apenas financiada por capitais próprios. Ex. B EBIT = 750 EBT = 750 Imp.s/lucros (20%) = (150) NOPLAT = 600 (cont.) NOPLAT = 600 Cap. Investido = 10.000 WACC = 2.500_ x 12 + 0,75 x 6 x (1-0,2) = 6,6 % 10.000 % equity média ponderada custo médio do debt % de debt WACC = 2.500_ x 12 + 0,75 x 6 x (1-0,2) = 6,6 % efeito fiscal (tax effect) 10.000 remuneração exigida pelos sócios custo do debt média ponderada do custo do equity Custo dos capitais investidos (em valor) = 10.000 x 0,066 = 660 1.6. EVA – Economic Value Added O EVA responde à questão se a empresa está a criar ou a destruir valor. EVA (conceito base) – a......

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...the expansion will meet the requirement of ARB. The competition will not be so fierce. ARB’s new products will still have some advantages over its competitors’. In a long-term period, the growth rate will be the same as the economic growth rate. We predict the growth rate will stay 3% after 2014 which is similar with the Australia economic growth rate. The following prediction is under the most likely scenario, under which the sales growth rate after 2014 will remain at 3%. Condensed income statement | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | Sales Growth Rate | 11.39% | 19.34% | 15% | 11% | 9% | 7% | Sales | 192300 | 230100 | 264615 | 293723 | 320158 | 342569 | Tax expense | 10434 | 14387 | 16557 | 18882 | 20581 | 22022 | NOPLAT margin | 12.66% | 14.59% | 14.8% | 15% | 15% | 15% | NOPAT | 24345 | 33572 | 38634 | 44058 | 48024 | 51385 | Interest Rate (after tax) | 2.77% | 2.77% | 2.77% | 2.77% | 2.77% | 2.77% | Interest expense | 42 | 0 | 142 | 300 | 327 | 350 | Net income | 22540 | 32630 | 38491 | 43757 | 47696 | 51034 | (Foresting worksheet attach after the report) From the historical data, ARB generated high sales revenue. Almost 14% growth rate of sales revenue had been reached over the past 10 years. Especially in 2010, ARB had achieved a 19% growth in sales revenue. These excellent results are due to the property of automobile accessories industry, the favorable economic environment and the business strategy of ARB, which we have discussed.......

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...price/book) to return on capital or equity or to an ‘excess return multiple’. This approach provides a clear picture of over- and undervaluation, since it directly ties the market’s valuation of an asset to the excess return earned over and above the cost of that asset, in a linear fashion. All key value drivers are shown and related to market value in a single chart. Chart 3: Asset multiple to excess return multiple 4.1.4 Multiple to interest rate A less common approach is to compare a yield measure with interest rates or the cost of capital. The earnings yield ratio is the most commonly used of this type of comparison. Another approach is to compare a multiple to the reciprocal of the cost of capital, eg PE:(1/cost of equity) or EV/NOPLAT:(1/WACC). 4.2 Choosing the right multiple This is a matter of individual judgment and common sense. Multiples used should be relevant and useful and result in the least overlap. Economy of effort is also important: there is an inevitable trade-off between cost/time involved in adjusting multiples and improved comparability. It is recommended that multiples be tested for statistical significance, using at least one business cycle of time-series data. 5. Enterprise value multiples 5.1 What is Enterprise Value? 5.1.1 Enterprise value or EV is the cost of buying the right to the whole of an enterprise's core cash flow 5.1.2 It is equal to the estimated value of the operations of an enterprise as represented by the value......

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...mungkin tidak berkelanjutan ? Akhirnya , menilai kesehatan keuangan perusahaan untuk menentukan apakah ia memiliki sumber daya keuangan untuk melakukan bisnis dan membuat jangka pendek dan jangka panjang investasi. Tiga bagian pertama dari bab ini melalui langkah-langkah yang terlibat dalam menganalisis ROIC , pertumbuhan pendapatan , dan kesehatan keuangan , masing-masing. Akhir bagian dari bab ini meliputi ukuran alternatif kinerja keuangan : cash flow return on investment ( CFROI ) Analisis hasil pada Modal Diinvestasikan Dalam Bab 7 , kami melakukan reorganisasi laporan laba rugi menjadi laba operasi bersih kurang pajak disesuaikan / net operating profit less adjusted taxes ( NOPLAT ) dan neraca menjadi modal yang diinvestasikan . ROIC mengukur rasio NOPLAT untuk modal yang diinvestasikan ROIC = NOPLAT / INVESTED CAPITAL Sejak laba diukur dari satu tahun penuh, sedangkan modal diukur hanya pada satu titik waktu, kami sarankan Anda rata mulai dan berakhir diinvestasikan modal. Perusahaan yang melaporkan ROIC dalam laporan tahunan mereka sering menggunakan modal awal. Jika aset baru yang diperoleh selama tahun menghasilkan tambahan pendapatan, bagaimanapun, menggunakan modal awal saja akan melebih-lebihkan ROIC. ROIC adalah alat analisis yang lebih baik untuk memahami performance performance perusahaan dari return on equity (ROE) atau return on asset (ROA) karena berfokus hanya pada operasi perusahaan. Return on equity campuran operasi performance dengan struktur modal,......

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...Does the company have any unique strategic positioning within the industry? – One paragraph 3. Present a qualitative assessment of the future outlook for the company. For example, are there any new products in the pipeline? Do you anticipate any competitive threats? Based on these developments, do you expect BBC’s growth and profitability to improve deteriorate, or stay about the same as in the past? 4. Revenue Forecasts and Free cash flow forecasts for the next ten years– • Specifically explain if you are forecasting revenue and FCF growths and profit margins that are significantly different from the company’s historical experience and why. 5. Present a DCF analysis and determine BBC’s intrinsic value. Assume that BBC’s Enterprise Value/ NOPLAT will be 18 ten years from now (check for sensitivities by assuming a multiple of either 15 or 20). 6. Present a valuation based on valuation ratios (P/B, P/E, P/S) for comparable firms. What price would you recommend based on these valuation ratios? Based on your recommended price, is BBC’s P/B ratio bigger or smaller than that of Redhook? Of Pete’s? Can you justify this difference? Do the same analysis for P/E and P/S ratios. (Note: Suppose a particular valuation ratio for one firm is 25 and you recommend a corresponding valuation multiple of 35 for BBC.2 Justify why BBC would command a higher valuation ratio. Justify the direction of the difference (higher or lower) and you do not have to precisely justify why BBC’s valuation......

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...2010 by Harvard Business School Mr. Wathen, the exclusive owner of California Plant Protection (CPP) has the opportunity, and most of all desire, to acquire one of the most recognizable brand names in the security guard industry, Pinkerton, for $100 million. Throughout the bidding process, he has faced skepticism from his board of directors as they consider the purchase to result in a overload for CPP’s corporate management. Can Mr. Wathen convince his board of directors that Pinkerton is worth the $100 million? If yes, how should Mr. Wathen finance the acquisition? Is he in any danger of being outbid by other players? We value Pinkerton under American Brands to $73.25 million, using a P/E multiple (Wackenhut) of 12.2 times Pinkerton’s NOPLAT in 1988 of $5.98 million. For Wathen however, including the possibility of any synergies created by a potential takeover, we reach a final value of $187.06 million, where synergy effects value is estimated to $19.4 million. However, in a pessimistic scenario the value of Pinkerton would be $141.51 million without any synergy effects. Taking the assumption of a 50/50 probability of either of the two scenarios might occur (in lack of better information); we reach an estimated value of $166.28 million. We recommend that Wathen bid the $100 million, by raising $75 million debt and $25 million equity. Wathen (CPP) should bid on Pinkerton, as our estimated value of a merger exceeds the cost. However, Wathen has insufficient solvency to......

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...1,464,440 Invested Capital 593,060 3,216,440 Interest expense Income before taxes Net Income Table 9: Advanced Financial Model of Intuit Adjusted EBIT 4,446,683 NOPLAT 2738438.14 NOPLAT Margin 14.68% Capital Efficiency 31.46 ROIC 461.75% Core Free Cash Flow 115,058 Opportunity Cost of Invested Capital 15% Core Economic Profit 2649479 Built up method for Cost oEquity Treasury Rate Risk Premium Industry 3.20% 5.40% 3.40% Treasury rate: Based on http://research.stlouisfed.org/fred2/series/BAA?cid=119 is 4.85% for Baa bond. I assume that Intui Risk Primium for Equity is based on Professor Aswath Damodaran from his website http://research.stlouisfed.org/fred2/seri Industry risk: 3.40% for computer sofware based on SBBI Industry Risk Table Size Risk: The company is not very big as big companies are expected to have no risk, therefore 2% risk is considered for t Company Specific Risk: The company is considered to be risky since it's not doing very well in last year and 1% is conside Finally, a discount rate of 15% is considered for this company. Table 10: Intuit CFCF/EBITDA Year 1988 1989 1990 1991 1992 1993 1994 Table 11: Historical Finanical Model of Intuit Corp 1988 6,067,000 Revenue 19989 18,658,000 Revenue Growth 208% EDBITDA 1,417,000 NOPLAT 4,292,000 2,738,438 NOPLAT Margin 15% Invested Capital 593,060 3,216,440 Invested Capital growth 442% Capital Efficeincy 31.46 ROIC 462% Core Free Cash Flow 115,058 Opportunity......

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...company’s products are built on older software platforms. Analysis Below is the analysis of the relevant information about TeamSystems, the advantages and disadvantages of Palamon investing into TS. To acquire a 51% common equity, Louis Elson must determine the value of the share. Is 25.9 million Euros a fair assessment? Elson assumes that TS revenue growth of 15%, and WACC OF 14%. The market growth rate is 6%. TeamSystem’s future cash-flow can be determined using historical data. For instance, the cash-flow can be estimated using the midyear adjustments, and the exchange rate EURO/Italian conversion rates. So, using the assumptions above, free cash-flow can be determined as shown below: FCF = NOPLAT – Net Investment in IC, NOPLAT = EBITA x (1 – T) Net Investment in IC = Change in Operating Working Capital + PPE. Operating Working Capital Operating Current Assets - Operating Current Liabilities = (51% - 37%= 16%) Total Sales PPE = Land, PPE + Other Tangible Assets. Continuing value 2007 = FCF 2008/ (WACC – g) = FCF 2007 x (1 +g)/ (WACC – g) = 97,414 ITL millions (after including discount factor 14%). Value of operation = Present value of FCF 2000-2007 + Continuing value = 183,062 ITL. Also, the value of equity = value of enterprise – value of debt = 137,062 ITL. Therefore, the 51% TeamSystem’s shares Palamon Capital is considering to buy = Value of equity x 51% (LIBRA) = 69,902 ITL. And using the exchange rate on 1 January,......

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.................................................. 9 DELIMITATIONS AND ASSUMPTIONS ............................................................................................................................ 10 METHODS .............................................................................................................................................................. 12 HISTORICAL FINANCIAL ANALYSIS........................................................................................................... 13 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 REARRANGING THE BALANCE SHEET - ANALYZING INVESTED CAPITAL .................................................................................. 13 REARRANGING THE INCOME STATEMENT – ANALYZING NOPLAT ...................................................................................... 14 ANALYZING THE FREE CASH FLOW .............................................................................................................................. 15 REINVESTMENT RATIOS ............................................................................................................................................. 16 RETURN ON INVESTED CAPITAL (ROIC) ........................................................................................................................ 16 ANALYSIS OF REVENUE GROWTH ................................................................................................................................. 17 CAPITAL......

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...requirements to continue business operations. 5. Sound asset base that can be used to raise debt as collateral . Overall Valuation Approach Since the leverage ratio for Congoleum will decrease over time as debt used to finance the purchase is repaid, we will use the APV approach rather than the WACC. APV Approach : Value of levered firm = Value of unlevered firm + PV of Int. Tax Shield 1. Assumptions & Approach A. Value of Unlevered Firm – i.e. value the company as if the company is all-equity financed. 1. Calculate cost of unlevered equity by de-leveraging the equity beta at 7% debt-to-capitalization ratio. Risk-free rate and market risk premium are given. (source: Exhibit 9) 2. Calculate the FCF to firm by using NOPLAT + Depreciation – Capex – net changes in WC (source: Exhibit 13) 3. Find sum of PV (FCF) for 1980-1984 4. Assume growth rate in FCF of 8%. This is a conservative estimate of the growth rate. (source: Inflation rate in 1987 was approximately 8%). 5. Find Terminal Value of FCF and then PV(Terminal Value of FCF) B. PV(ITS) 1. Calculate cost of debt using average of comparables with similar debt structure. Since Congoleum will have over 90% debt post-merger, gradually decreasing to xx% in 1984, we took the average yield for CCC bonds (source: in Exhibit 10) 2. Calculate ITS for 1980-1984 as interest expense x tax rate (source: Exhibit 13) 3. Find sum of PV(ITS) for 1980-1984. 4. Find Terminal......

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...9. b. βD is assumed to be 0.1-0.3 based on comparable S&P ratings and ratios of debt to total capital in Exhibit 10. c. Risk free rate given to be 9.5% and market risk premium is 8.6% d. Use historical proportion of operating income by segment in Exhibit 4 to aggregate Congoleum’s unlevered beta e. Calculate RU using the CAPM formula RU= RF + βU x MRP f. Alternatively, unlever Congeluem’s βE given in Exhibit 9 to get βE and Ru 2. Operating FCF Build discounted cash flow model with 5-year explicit forecast period from 1980-1984, as follows: a. Use projected Operating Income from Exhibit 15. b. From Exhibit 13, deduct corporate expenses and depreciation + amortization c. Less corporate taxes at 48% rate to get NOPLAT. d. Add back to NOPLAT the depreciation + amortization figures, less capital expenditure and changes in working capital. This gives the FCF to all capital 3. Calculate RD a. Due to the increased gearing of the Congoleum post LBO to >80%, the overall debt rate should effectively be higher than the bank senior financing of 14%. From Exhibit 10, such a debt rate corresponds to an S&P CCC rating. b. It is likely that the new senior and subordinated notes have lower interest rates because the “strips” issued to the insurance company investor includes preferred stock that pays additional (guaranteed) dividends. c. RD is the average of the CCC debt yields. 4. Calculate Tax Shield Benefit a. From Exhibit 16, find the present value of tax......

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...rating is 5.84% (Exhibit-9) and is used as cost of debt for Ingersoll. Cost of equity: Using CAPM [Rf+ β(Rm-Rf)], based on its debt rating , 4.97% is used as risk free rate of return (Rf). An average beta of the industry (0.85) is taken because it reflects the average risk of industry on the whole and hence is a better approximation for target’s risk. A market risk premium (Rm-Rf) of 5.9% is used as a common practice. See sheet 1 for WACCs for both Timken and Torrington. Secondly, I used the estimated future cash flows of Torrington, from 2003 to 2007 to determine Torrington's current value. The FCFs for Torrington are assumed to grow at an average GDP growth rate 2.5% constantly forever after year 2007. Afterwards, Forecasted FCFs (NOPLAT+ Depreciation-Capital expenditure+ change in NWC) are discounted by Ingersoll’s (parent firm of Torrington) weighted average cost of capital 7.57. Hence, the PV of Torrington $1100.15 million is evaluated. sheet2: Stand-Alone Valuation of Torrington-DCF Method. The second Stand-Alone Valuation approach is using Multiples. I used the information from exhibit 8 to process this valuation. The ratios of Enterprise value/ EBITDA are given on the exhibit; therefore the peer companies’ average Enterprise value/EBITDA is evaluated to be 7. Then, I calculated Torrington’s 2002 EBITDA to be $106.2(operating income +depreciation expense).Hence, Torrington company’s enterprise value $760 ($106.2*7=$760) million is estimated. In addition, the......

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