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Kohler

Duncan Baker, Robert Gage, Arlington Wade, Shelton


Headley, Taylor Henderson

Kohler Co. was created in 1873 by Walter Kohler and has been one of the leaders in plumbing fixture
manufacturing since 1883. Since its creation, it has been under the control descendants of Walter and been
ran as a private company. In an attempt to retain this ownership, Herbert Kohler, the current CEO, has
decided to require that shareholders sell their shares to Kohler family members or the company. Recently,
shareholders have claimed that his estimation of $55,400 is entirely to low. They believe that the stock
should be valued at $273,000 and are attempting to challenge his price in court. What method should of
valuation should Kohler use to value their firm, and what is the current value of their stock?
Using the discounted cash flow analysis, we concluded the total enterprise value to be $1,580414.15
(Exhibit 1). To find this, we had to use information from proxy firms to find the pure business risk, also
known as the unlevered beta, which is .78 (Exhibit 2). Using this information, we had to re-lever their beta
using data about their firm. Kohler is financed with 46% debt and 54% equity, which resulted in a levered
beta of 1.16. We then used this levered beta to compute Kohlers cost of equity using CAPM, 14.34%
(Exhibit 2). We used a risk-free rate of 6%, 20 year yield on U.S. Government Securities, in this calculation
because Kohler is the leading producer of high quality plumbing fixtures in a market that has little
competitors and our belief is that they will be seen as the leader for years to come and will have little to no
new competitors in the future. This provided a WACC of 9.16% (Exhibit 2). Next, we calculated the free
cash flows from years 1998 to 2002. We believe that Kohlers free cash flow will enter into constant growth
after 2003, with growth being around 4.7%. The growth rate was found by averaging the gross profit for the
previous two years. We used this growth rate to find the free cash flow for 2003 to solve for the terminal
value. Once this was found, we discounted everything to April 1998 using a mid-period discount factor
because the cash flows occur at the end of the first quarter instead of the end of the year. This resulted in the
total enterprise value and a share price of $118,527.83 (Exhibit 1).
After using the discounted cash flow approach to find Kohlers share price and total enterprise value, we
then used the multiples of comparable companies to find the same values. We believe that comparing both

approaches will provide a better interpretation of the appropriate values needed for our analysis. Using the
averages and medians of Kohlers comparable companies, we found that Kohlers share price to be valued at
$126,402.04 and total enterprise value to be $1,640,162.75 (Exhibit 7). When using this method the share
price for Kohler is lower than the share price calculated using the discounted cash flow approach, while the
enterprise value is higher.
Finding the share price estimated by Kohler and the price estimated by shareholders involve different
assumptions. Kohler believes that the price of their shares should be somewhere around $55,400, which is
dramatically lower than the $273,000 that shareholders believe the value to be. Shareholders think that the
price should be high because Kohler Co. has seen a tremendous rise in sales and the company has continued
to retain around 90% of earnings to reinvest in future projects. They believe that the firms future growth
should be around 6.741% constantly, which would provide them the $273,000. Kohler believes that this
growth should be a lot lower. Using a growth rate of 2.355% would provide him with $55,400 per share
(Exhibit 6). If they do go trial, the maximum amount that Kohler should be able to settle is $120,680
(Exhibit 3).
Our Analysis has provided us with very useful information about the value of Kohler and its shares.
It has provided an enterprise value and share price for discounted cash flows ($1,580,414.15 and
$118,527.83) and the multiples approach ($1,640,162.75 and $126,402.04). We believe the discounted cash
flows method to be the most accurate because it relies on data purely of Kohler instead of multiples of
comparable firms in the same industries. Kohler should offer shareholders more money, maximum
$120,680, instead of letting a court decide on their belief of the true value.