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  • Inputs: Hints On Control Value

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    This document provides inputs and calculations to value a firm under its current status quo and an optimal scenario. It calculates the firm's cost of equity, cost of debt, cost of capital, after-tax return on capital, expected growth rate, and value under each scenario based on inputs like the riskfree rate, risk premium, beta, tax rate, revenues, EBIT, debt ratio, and reinvestment rate. The optimal scenario results in a higher pre-tax return on capital, after-tax return on capital, expected growth rate, terminal value, and overall firm value, resulting in a value of synergy of $119.40 million.

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    This document provides inputs and calculations to value a firm under its current status quo and an optimal scenario. It calculates the firm's cost of equity, cost of debt, cost of capital, after-tax return on capital, expected growth rate, and value under each scenario based on inputs like the riskfree rate, risk premium, beta, tax rate, revenues, EBIT, debt ratio, and reinvestment rate. The optimal scenario results in a higher pre-tax return on capital, after-tax return on capital, expected growth rate, terminal value, and overall firm value, resulting in a value of synergy of $119.40 million.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as XLS, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    24 views3 pages

    Inputs: Hints On Control Value

    Uploaded by

    api-3763138
    This document provides inputs and calculations to value a firm under its current status quo and an optimal scenario. It calculates the firm's cost of equity, cost of debt, cost of capital, after-tax return on capital, expected growth rate, and value under each scenario based on inputs like the riskfree rate, risk premium, beta, tax rate, revenues, EBIT, debt ratio, and reinvestment rate. The optimal scenario results in a higher pre-tax return on capital, after-tax return on capital, expected growth rate, terminal value, and overall firm value, resulting in a value of synergy of $119.40 million.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as XLS, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 3

    Inputs

    Current riskfree rate = 4.50%


    Risk Premium = 4.00%
    I will assume that there are zero excess returns beyond your high growth phase.

    Status Quo Optimal


    Beta 0.90 1.06
    Pre-tax cost of debt 6.00% 7.00% Hints on control value
    Tax rate 40.00% 40.00% 1. Check on capital structure
    Debt to Capital Ratio 10.00% 30.00% 2. Check on current pre-tax
    3. Check after-tax return on
    Revenues $1,000.00 $1,000.00 4. If return on capital is high
    Operating Income (EBIT) $50.00 $60.00 5. If the firm has potential fo
    Always work within the realm
    Pre-tax return on capital 10.00% 15.00%
    Reinvestment Rate = 30.00% 30.00%

    Length of growth period = 5 5

    Computed Values Value of firm with synergy


    Cost of Equity = 8.10% 8.74%
    After-tax cost of debt = 3.60% 4.20%
    Cost of capital = 7.65% 7.38%

    After-tax return on capital = 6.00% 9.00%


    Reinvestment Rate = 30.00% 30.00%
    Expected growth rate= 1.80% 2.70%

    Value of firm
    PV of FCFF in high growth = $89.07 $110.45
    Terminal value = $448.04 $582.39
    Value of firm today = $398.99 $518.39

    Value of Synergy
    Value of status quo $398.99
    Value of optimal $518.39
    Value of control $119.40
    nts on control value
    Check on capital structure to see if a different mix can lower cost of capital (Use capital structure spreadsheet which is ava
    Check on current pre-tax operating margin and check against industry averages; May provide clues for potential cost cutti
    Check after-tax return on capital. If it is below cost of capital, set at least to cost of capital. If it is above the cost of capita
    If return on capital is high, check reinvestment rate. If it is very low, check to see if there is potential for increase.
    If the firm has potential for competitive advantages, see if you can lengthen the growth period (will work only if there are
    ways work within the realm of the possible…
    spreadsheet which is available online)
    es for potential cost cutting
    s above the cost of capital, check against industry averages and historical trend line.
    ntial for increase.
    will work only if there are positive excess returns).

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