Chapter-14收購、兼并和重組課后題目

HIGHLYLEVERAGEDTRANSACTIONS:

LBOValuationandModelingBasicsAbillionhereandabilliontheresoonaddsuptorealmoney.—EverettDirksenExhibit1:CourseLayout:Mergers,Acquisitions,andOtherRestructuringActivitiesPartIV:DealStructuringandFinancingPartII:M&AProcessPartI:M&AEnvironmentCh.11:PaymentandLegalConsiderationsCh.7:DiscountedCashFlowValuationCh.9:FinancialModelingTechniquesCh.6:M&APostclosingIntegrationCh.4:BusinessandAcquisitionPlansCh.5:SearchthroughClosingActivitiesPartV:AlternativeBusinessandRestructuringStrategiesCh.12:Accounting&TaxConsiderationsCh.15:BusinessAlliancesCh.16:Divestitures,Spin-Offs,Split-Offs,andEquityCarve-OutsCh.17:BankruptcyandLiquidationCh.2:RegulatoryConsiderationsCh.1:MotivationsforM&APartIII:M&AValuationandModelingCh.3:TakeoverTactics,Defenses,andCorporateGovernanceCh.13:FinancingtheDealCh.8:RelativeValuationMethodologiesCh.18:Cross-BorderTransactionsCh.14:ValuingHighlyLeveragedTransactionsCh.10:PrivateCompanyValuationLearningObjectivesPrimaryLearningObjective:ToprovidestudentswithaknowledgeofalternativeapproachestovaluingleveragedbuyoutsandthebasicsofLBOmodelingtechniquesSecondaryLearningObjectives:ToprovidestudentswithaknowledgeofCostofcapitalapproachtovaluation;Adjustedpresentvalueapproachtovaluation;Theadvantagesanddisadvantagesofeachvaluationapproach;andTheunderpinningsofLBOstructuringandvaluationmodelsValuingLBOsAleveragedbuyoutcanbeevaluatedfromtheperspectiveofcommonequityinvestorsorofallinvestorsandlendersFromcommonequityinvestors’perspective, NPV=PVFCFE–IEQ

≥0WhereNPV=NetpresentvaluePVFCFE=PresentvalueoffreecashflowstocommonequityinvestorsIEQ=ThevalueofcommonequityFrominvestors’andlenders’perspective, NPV=PVFCFF–ITC

≥0WherePVFCFF=PresentvalueoffreecashflowstothefirmITC=Totalinvestmentorthevalueoftotalcapitalincludingcommonandpreferredstockandalldebt.DecisionRulesLBOsmakesensefromviewpointofinvestorsandlendersifPVoffreecashflowstothefirmis≥tothetotalinvestmentconsistingofdebtandcommonandpreferredequityHowever,aLBOcanmakesensetocommonequityinvestorsbutnottootherinvestorsandlenders.Themarketvalueofdebtandpreferredstockheldbeforethetransactionmaydeclineduetoaperceivedreductioninthefirm’sabilitytoRepaysuchdebtasthefirmassumessubstantialamountsofnewdebtandtoPayinterestanddividendsonatimelybasis.ValuingLBOs:CostofCapitalMethod1Adjustsforthevaryinglevelofriskasthefirm’stotaldebtisrepaid.Step1:Projectannualcashflowsuntil targetD/EachievedStep2:Projectdebt-to-equityratiosStep3:CalculateterminalvalueStep4:Adjustdiscountratetoreflect changingriskStep5:Determineifdealmakessense1Alsoknownasthevariableriskmethod.CostofCapitalMethod:Step1

ProjectannualcashflowsuntiltargetD/EratioachievedTargetD/EisthelevelofdebtrelativetoequityatwhichThefirmwillhavetoresumepaymentoftaxesandTheamountofleverageislikelytobeacceptabletoIPOinvestorsorstrategicbuyers(oftentheprevailingindustryaverage)CostofCapitalMethod:Step2Projectannualdebt-to-equityratiosThedeclineinD/EreflectsTheknowndebtrepaymentscheduleandTheprojectedgrowthinthemarketvalueofshareholders’equity(assumedtogrowatthesamerateasnetincome)CostofCapitalMethod:Step3Calculateterminalvalueofprojectedcashflowtoequityinvestors(TVE)attimet,(i.e.,theyearinwhichtheinitialinvestorschoosetoexitthebusiness).TVErepresentsPVofthedollarproceedsavailabletothefirmthroughanIPOorsaletoastrategicbuyerattimet.CostofCapitalMethod:Step4Adjustthediscountratetoreflectchangingrisk.Thefirm’scostofequitywilldeclineovertimeasdebtisrepaidandequitygrows,therebyreducingtheleveraged?.Estimatethefirm’s?asfollows:?FL1=?IUL1(1+(D/E)F1(1-tF))where?FL1=Firm’sleveredbetainperiod1?IUL1=Industry’sunleveredbetainperiod1=?IL1/(1+(D/E)I1(1-tI))?IL1=Industry’sleveredbetainperiod1(D/E)I1=Industry’sdebt-to-equityratioinperiod1tI=Industry’smarginaltaxrateinperiod1(D/E)F1=Firm’sdebt-to-equityratioinperiod1tF=Firm’smarginaltaxrateinperiod1Recalculateeachsuccessiveperiod’s?withtheD/Eratioforthatperiod;and,usingthatperiod’s?,recalculatethefirm’scostofequityforthatperiod.

CostofCapitalMethod:Step5DetermineifdealmakessenseDoesthePVoffreecashflowstoequityinvestors(includingtheterminalvalue)equalorexceedtheequityinvestmentincludingtransaction-relatedfees?EvaluatingtheCostofCapitalMethodAdvantages:Adjuststhediscountratetoreflectdiminishingriskasthedebt-to-totalcapitalratiodeclinesTakesintoaccountthatthedealmaymakesenseforcommonequityinvestorsbutnotforlendersorpreferredshareholdersDisadvantage:CalculationsmoreburdensomethanAdjustedPresentValueMethodCostofCapitalMethod:AnIllustrationPresentValueofEquityCashFlowUsingtheCostofCapitalMethod(CC)Assumptions20122013201420152016201720182019MarketValueof12%PIKPreferredEquity($Million)2224.627.630.934.638.843.448.6MarketValueofCommonEquity($Million)32.33.34.05.05.45.76.0Equity($Million)2527.030.934.939.644.249.154.6Debt($Million)4739.531.523.819.214.38.82.7ComparableFirm

Price/EarningsRatio6

LeveredBeta(?)2.4

Debt/EquityRatio0.3

UnleveredBeta2.0

MarginalTaxRate0.4

10-YearTreasuryBondRate0.05

RiskPremiumonStocks(%)0.055

TerminalPeriodGrowthRate(%)0.045

TerminalPeriodCostofEquity(%)0.10

YearDebt/EquityLeveragedBetaCostofEquityCumulativeDiscountFactorAdjustedEquityCashFlowPVofAdjustedEquityCashFlow20131.53.80.2601/(1.26)=0.7937.3.320141.03.30.2301/[(1.26)(1.23)]=0.6452.2.120150.72.90.2081/[(1.26)(1.23)(1.208)]=0.53411.81.020160.52.60.1941/[(1.26)(1.23)(1.208)(1.194)]=0.44747.43.320170.32.40.1841/[(1.26)(1.23)(1.208)(1.194)(1.184)]=0.37787.72.920180.22.30.1741/[(1.26)(1.23)(1.208)(1.194)(1.184)(1.174)]=0.32188.12.620190.02.10.1651/[(1.26)(1.23)(1.208)(1.194)(1.184)(1.174)(1.165)]=0.27628.52.4PV(2013–2019)

12.5TerminalValue

44.7TotalPV

57.2ValuingLBOs:AdjustedPresentValueMethod(APV)Separatesthevalueofthefirminto(a)itsvalueasifitweredebtfreeand(b)thevalueoftaxsavingsduetointerestexpense.Step1:Projectannualfreecashflowstoequityinvestorsandinteresttaxsavings.Step2:Valuethetargetwithouttheeffectsofdebtfinancinganddiscountprojectedfreecashflowsatthefirm’sestimatedunleveredcostofequity.Step3:Estimatethepresentvalueofthefirm’staxsavingsdiscountedatthefirm’sestimatedunleveredcostofequity.Step4:Addthepresentvalueofthefirmwithoutdebtandthepresentvalueoftaxsavingstocalculatethepresentvalueofthefirmincludingtaxbenefits.Step5:Determineifthedealmakessense.APVMethod:Step1

Projectannualfreecashflowstoequityinvestorsandinteresttaxsavingsfortheperiodduringwhichthefirm’scapitalstructureischanging.Interesttaxsavings=INTxt,whereINTandtarethefirm’sannualinterestexpenseonnewdebtandthemarginaltaxrate,respectivelyDuringtheterminalperiod,thecashflowsareexpectedtogrowataconstantrateandthecapitalstructureisexpectedtoremainunchangedAPVMethod:Step2Valuetargetwithouttheeffectsofdebtfinancinganddiscountprojectedcashflowsatthefirm’sunleveredcostofequity.Applytheunleveredcostofequityfortheperiodduringwhichthecapitalstructureischanging.Applytheweightedaveragecostofcapitalfortheterminalperiodusingtheproportionsofdebtandequitythatmakeupthefirm’scapitalstructureinthefinalyearoftheperiodduringwhichthestructureischanging.APVMethod:Step3Estimatethepresentvalueofthefirm’sannualinteresttaxsavings.Discountthetaxsavingsatthefirm’sunleveredcostofequityCalculatePVforannualforecastperiodonly,excludingaterminalvalue,sincethefirmissoldandanysubsequenttaxsavingsaccruetothenewowners.APVMethod:Step4

CalculatethepresentvalueofthefirmincludingtaxbenefitsAddthepresentvalueofthefirmwithoutdebtandthePVoftaxsavingsAPVMethod:Step5Determineifdealmakessense:DoesthePVoffreecashflowstoequityinvestorsplustaxbenefitsequalorexceedtheinitialequityinvestmentincludingtransaction-relatedfees?Evaluatingthe

AdjustedPresentValueMethodAdvantage:Simplicity.Disadvantages:Ignorestheeffectofchangesinleverageonthediscountrateasdebtisrepaid,Implicitlyignoresthepotentialforbankruptcyofexcessivelyleveragedfirms,andUnclearwhethertruediscountrateshouldbethecostofdebt,unleveredcostofequity,orsomewherebetweenthetwo.AdjustedPresentValueMethod:AnIllustrationPresentValueofEquityCashFlowsUsingtheAdjustedPresentValueMethod

2013201420152016201720182019Assumptions

MarginalTaxRate(t)0.4

ComparableCompanyUnleveredBeta2

10-YearTreasuryBondRate0.05

Firm’sCreditRatingB

ExpectedCostofBankruptcyas%ofFirmMarketValue(perAndradeandKaplan,1998,andKorteweg,2010)0.2500

CumulativeProbabilityofDefaultforaB-RatedFirmover10Years0.3680

RiskPremiumonStocks0.0550

TerminalPeriodGrowthRate0.0450

2004–2010UnleveredCostofEquity0.1700

TerminalPeriodWACC

0.1200

AdjustedEquityCashFlow0.30.21.87.47.78.18.5Plus:TaxShield1.81.61.31.00.80.60.4Plus:TerminalValue

123.8Equals:TotalCashFlow2.21.83.28.48.58.7132.7PVof2013–2019CashFlows

$61.07Less:PVExpectedCostofBankruptcy

5.62PVofCashFlowsAdjustedforExpectedCostofBankruptcy

$55.45DiscussionQuestionsCompareandcontrastthecostofcapitalandtheadjustedpresentvaluevaluationmethods?Whichdoyouthinkisamoreappropriatevaluationmethod?Explainyouranswer.WhatisAnLBOModel?AnLBOmodelisusedtodeterminewhatafirmisworthinahighlyleveragedtransaction.Itisappliedwhenthereisthepotentialforafinancialbuyerorsponsortoacquirethebusiness.Themodelhelpsdefinetheamountofdebtafirmcansupportgivenitsassetsandcashflows.Investmentbankersfrequentlyemploysuchanalysesinadditiontodiscountedcashflowandrelativevaluationmethodsinvaluingbusinessestheyareattemptingtosell.FinancialbuyersseekLBOopportunitiesofferingafinancialreturninexcessoftheirdesiredrateofreturn,whileallowingthetargetfirmtomeetpotentialfutureoperatingchallenges.KeyLBOModelRelationshipsLinkingpurchaseprice(enterprisevalue)toindustrymultiples PPTF=(EV/EBITDA)×EBITDATFLinkingpurchaseprice(enterprisevalue)totargetfirm’sborrowingcapacityandfinancialsponsor’sequitycontribution PPTF=(DTF+ETF)whereDTF=netdebt(i.e.,totaldebtlesscashandmarketablesecuritiesheldbythetargetfirm)ETF=financialsponsor’sequitycontributiontothetargetfirm’spurchasepricePPTF=estimatedpurchasepriceofthetargetfirmorenterprisevalueEBITDATF=targetfirmearningsbeforeinterest,taxes,depreciation,andamorti