You are on page 1of 12

WACC Definition

WACC = (D/V)*Rd*(1-T) + (E/V)*Re


where V = D + E, Rd is the pretax cost of debt, T is the tax rate and Re is the cost of equity
COST OF DEBT
Estimate Rd
Estimate tax rate
After Tax Cost of Debt

6.60%
43.40%
3.74%

COST OF EQUITY = Rf + Beta*MRP


Risk free rate as of April 1998
Market risk premium

(Exhibit 8)

6%
7.50%

Equity Beta
We use comparable firms. But, first we need to decompose Kohler into its various groups.
Exhibit 4

Kohler Co. Income Statements 1997 by Group (in $ thousands, as of December 31)
Kitchen & Bath
Group

Power
Systems

1,485,831
1,045,038

540,260
461,140

145,414
92,564

50,789
43,041

Gross Profit

440,793

79,120

52,850

7,748

Selling & Administrative Exp.


Amortization of Intangibles
Operating Income after Depr.

284,097
156,696

44,600
###
34,520

45,580
7,270

4,872
2,876

Non-operating Income (Expense)


Interest Income
Interest Expense

-6,400
1,477
10,181

-269
180
2,428

514
142
1,633

0
12
1,040

Pretax Income

141,591

32,004

6,292

1,848

Income Tax Expense

54,179

11,605

2,291

727

Net Income

87,411

20,398

4,001

1,121

Net Sales
Cost of Sales

Interiors Hospitality &


Group
R. Estate

Percentage of Sum of 4 Groups


Net Sales
Gross Profit
Net Income

Comparables (Exhibit 7b)

67%
76%
77%

24%
14%
18%

7%
9%
4%

2%
1%
1%

American American
Standard Woodmark
Stock Market Data as of 4/30/1998
Ticker
Shares Outstanding (in thousands)
Stock Price ($)
Market Value of Equity
Market Value of Equity,
Average of Latest 36 Mths.
Equity Beta Over Latest 36 Months

Masco

Briggs &
Stratton

ASD
71,929
48.69
3,502.0

AMWD
7,811
30.25
236.3

MAS
169,634
58
9,838.8

BGG
24,514
45.25
1,109.3

2,762.9
0.82

82.0
0.76

5,937.3
1.28

1,210.0
0.66

Financial Data as of 3/31/1998 a


Latest Twelve Months
Total Debt
Sales
EBITDA
Cash Flow
EBIAT

2,404.0
6,139.5
699.3
462.5
292.6

13.4
327.0
37.6
27.4
17.1

1,187.9
3,945.0
838.4
553.4
437.3

259.6
1,327.2
178.3
127.2
80.4

Average of Latest Three Years


Total Debt
Sales
EBITDA
Cash Flow
EBIAT

2,216.6
5,767.8
667
420.9
263.5

12.3
262.7
30.7
22.1
13.7

1,341.3
3,414.0
721.9
473.6
367.4

155.4
1,282.2
187
132.1
87.1

5,906.0
0.59
0.49

249.7
0.95
0.72

11,026.7
0.89
1.14

1,368.9
0.81
0.53

V=D+E

E/V
Asset Beta = Equity Beta*(E/V)

These are unlevered betas - assuming a common debt beta equal to 0


Next, relever to Kohler's capital structure
Kohler Equity (Exhibit 3a)
Kohler Debt

538992
513056
Asset Beta
Ba
0.78
0.78

E/V

D/V

0.81
0.77

0.19
0.23

Equity Beta
Be
0.97
1.02

Weighted Average of 80% Kitchen


and 20% Power Systems

0.78

0.80

0.20

0.98

Ke Calculate Using CAPM

Use Asset Beta = Equity Beta*(E/V)

Avg of Kitchen & Bath Comparables


Average of Power Systems Comparables

D/V = 1-E/V

( Calculated as per Projected Income Statement Exhibit 6b)

( Apr -98 20 year bond Yield)


( Assumed rate for Before 2000 year period)
What is the equity beta for a private firm?

Elim. & Corp. Var.

-8,891
(4,398)
-4,492

Kohler Co. Consol. Sum of 4 Groups Sum of 2 Major Groups

( Kitch & Bath + Power)

$
$
$
576,019

2,222,294
1,641,783
580,511

$
$
$

2,026,091
1,506,178
519,913

379,149

328,697

201,362

191,216

(6,155)
1,811
15,282
181,735

$
$
$
$

(6,669)
1,657
12,609
173,595

$
$
87,974

68,802
112,931

$
$

65,784
107,809

2,213,403
1,637,385

942
21,618
-27,052

380,091
21,618
174,310

409
426
(1,251)

-5,746 $
2,237 $
14,031 $

-24,965

156,770

(6)

68,796

-24,957

Percentage of Sum of 2 Major Groups


Kitchen and Bath Power Systems
73%
27%
85%
15%
81%
19%

Cummins Engine

Detroit Diesel

CUM
42,036
54.38
2,285.7

DDC
24,701
23
568.1

2,053.6
1.09

502.5
1.30

1,250.0
5,821.0
487
390.2
224.2

107.4
2,233.0
105.5
82.8
41

686.7
5,431.0
448.3
377.5
221

127.3
2,090.7
100.2
78.2
40.5

3,535.7
0.65
0.70

675.5
0.84
1.09

Rf
MRP
A-T Rd

Cost of Equity
Ke
13.24%
13.61%
13.32%

6.00%
7.50%
3.74%

A-T Cost of Debt


kd*(1-T)
3.74%
3.74%
3.74%

WACC
Kd*(1-T) * D/V+ E/V*Ke
11.4%
11.3%
11.4%

REFERENCE : Use Exhibit 7b OF THE CASE


Each multiple is the ratio of the total enterprise value (MVE+BV of Debt) to the accounting

American Standard
American Woodmark
Masco
Briggs & Stratton
Cummins Engine
Detroit Diesel

Market
Value of Equity
3502.00
236.30
9838.80
1109.30
2285.70
568.10

Total
Debt
2404.00
13.40
1187.90
259.60
1250.00
107.40

Average of Kitchen and Bath Comparable Companies


Median of Kitchen and Bath Comparable Companies
Average of Power Systems Comparable Companies
Median of Power Systems Comparable Companies
Average of All Six Comparable Companies
Median of All Six Comparable Companies
Weighted Average 80% Kitchen & Bath, 20% Power Systems ( based on % revenues of both group of Kholer Co.)
Kohler Co. Total Enterprise Values Implied by Multiples for Comparable Companies (in $ millions)
Sales
Multiple

EBITDA
Multiple

2,270

194.04

Average of Kitchen and Bath Comparable Companies


Median of Kitchen and Bath Comparable Companies

3420.65
2183.67

1826.47
1638.78

Average of Power Systems Comparable Companies


Median of Power Systems Comparable Companies

1468.94
1378.81

1380.30
1408.76

Average of All Six Comparable Companies


Median of All Six Comparable Companies

2444.80
1958.53

1603.39
1449.25

Weighted Average 80% Kitchen & Bath, 20% Power Systems

3030.31

1737.24

Kohler Co. Accounting Items for


12 Months ending 4/30/98
Kohler Co. Values Implied by Multiples --

Exhibit 7b OF THE CASE


VE+BV of Debt) to the accounting /valuation item of interest
Total
Enterprise Value
5906.00
249.70
11026.70
1368.90
3535.70
675.50

Sales
Multiple
0.96
0.76
2.80
1.03
0.61
0.30

EBITDA
Multiple
8.45
6.64
13.15
7.68
7.26
6.40

Cash Flow
Multiple
12.77
9.11
19.93
10.76
9.06
8.16

EBIAT
Multiple
20.18
14.60
25.22
17.03
15.77
16.48

1.51
0.96

9.41
8.45

13.94
12.77

20.00
20.18

0.65
0.61

7.11
7.26

9.33
9.06

16.42
16.48

1.08
0.86

8.26
7.47

11.63
9.94

18.21
16.75

1.33

8.95

13.01

19.29

Cash Flow
Multiple

EBIAT
Multiple

Avearge of
4 Multiples

Median of
4 Multiples

119.13

98.34

1660.21
1521.26

1966.88
1984.95

2218.55
1832.16

1896.67
1811.87

1111.14
1079.47

1615.14
1620.21

1393.88
1371.81

1424.62
1393.78

1385.67
1183.85

1791.01
1647.28

1806.22
1559.73

1697.20
1548.27

1550.39

1896.53

2053.62

1816.88

f both group of Kholer Co.)

n $ millions)

Valuation date: 4/30/98


Discounted Cash Flow Valuation ( all figures in $ thousand)
WACC
Perpetuity growth rate ( g)

11%
4%
1998
1999
2000
2001
160,121
126,032
171,619
187,978
44.3%
43.42%
43.42%
43.42%
70,872
54,724
74,518
81,621
89,249 $
71,308 $ 97,101 $ 106,357

Operating Income after Depreciation


Tax Rate
Taxes
EBIAT ( NOPAT)

Depreciation and Amortization


Net Capital Expenditures
Change in Net Working Capital
Free Cash Flow

$
$
$
$

56,113
(87,691) $
(1,435)
24,224

87,661
(97,205) $
(5,762)
56,002

91,786
(96,971) $
(27,705)
64,211

94,593
(96,811)
(17,702)
86,437

Discounting Period (mid-period)


Present Value
Present Value of Cash Flows

1.17
$49,565

2.17
$51,199

3.17
$62,091

0.33
$23,404
239,085

Terminal Value
Present Value of Terminal Value

874,192

Total Enterprise Value

$ 1,113,277

$
$

You can change the valuation by having a monority discount (start approx 20%) Al

2002
2002 Normalized
201,604
201,604
43.42%
43.42%
$

87,537
114,067

87,537
114,067
NWC

97,355
(106,647)
(23,145)
81,630

-23145
90,922

4.17
$52,827

4.17
$58,840

9,097
6,644
(15,744)
21707
-23139
(1,435)

$1,350,840

onority discount (start approx 20%) Also tack on discount for market instability (start approx 40%)

Shares
COMMON VOTING STOCK
RESTICTED VOTING STOCK
NON VOTING SERIES A STOCK
NON VOTING SERIES B STOCK
TOTAL

INITIAL ( BEFORE RECAP)


7445
142.89
0
0
7587.89

Apr-98
9000
250000
2196000
45000
2500000

Dec-98
( Additional)
6611
33965
1613084
33055
1686715

Total
15611
283965
3809084
78055
4186715

You might also like