Professional Documents
Culture Documents
Percentage of Sales
Cost of Goods 67% 67% 67% 68% 69%
Sell, Genl, Admin. 22% 23% 21% 22% 22%
Operating Income 6.6% 5.3% 7.3% 6.2% 5.4%
Stockholder Information
Earnings Per Share $ 2.91 $ 1.88 $ 3.25 $ 2.74 $ 2.23
Dividends Per Share 1.60 1.60 1.60 1.60 1.60
Book Value Per Share 49.40 49.68 51.33 52.47 53.10
Market Price 33-46 35-48 29-41 25-33 23-32
Price/Earnings Ratio 11-16 10-26 9-13 9-12 10-14
Shares Outstanding 584,000 584,000 584,000 584,000 584,000
Exhibit 2 Balance Sheet at December 31, 2002, Robertson Tool Company
(millions of dollars)
Assets Liabilities and Net Worth
Financial Position
Current Assets $ 25 $ 46 $ 49 $ 41 $ 46
Current Liabilities 6 11 15 10 13
Net Working Capital 19 35 34 31 33
Long-term Debt 10 18 16 15 17
Shareholders Equity 21 36 40 41 41
Stockholders Information
Earnings Per Share $ .78 $ .61 $ .59 $ .21 $ .54
Dividends Per Share 0 0 0 0.20 0
Book Value Per Share 8.31 6.86 7.37 7.38 7.45
Market Price 6-17 10-18 7-18 4-10 5-8
Price/Earnings Ratio 8-22 16-30 12-31 19-48 9-15
Shares Outstanding 2,525,600 5,245,900 5,430,100 5,510,000 5,501,000
Exhibit 4 ProFormas for Robertson Tool (millions of dollars)
Actual Forecasts
2002 2003 2004 2005 2006 2007 to Infinity
Times Interest Earned 3.8 3.2 7.1 11.5 7.8 9.3 3.5
Debt % Capital
balance sheet values 98% 52% 30% 27% 29% 40% 28%
market values 29% 37% 20% 17% 19% 24% 37%
Bond Rating BB- BB+ BBB - A+ A -
Share Price $ 42 $ 42 $ 29 $ 22 $ 26 $ 27 $ 30
Earnings Per Share 2.80 3.20 2.00 1.78 1.80 2.32 2.32
Price/Earnings 15.0 13.1 14.5 12.4 14.4 11.6 13.5
Equity Beta 1.00 1.00 1.00 .75 1.05 .95 avg equity beta = 1.05
Asset Beta .71 .63 .80 .63 .85 .73 avg asset = .73
beta
B levered =
Exhibit 7 Information on United States Capital Markets
I. Interest Rates in May 2003
30-Year U.S. U.S. Corporate Bonds Rated
Treasury Bonds AA A BBB BB
4.10% 4.52% 5.07% 6.07% 7.96%
II. Estimated Market Risk Premium = 5.5% over 30-Year U.S. Treasury Bonds
III. Median Values of Key Ratios by Standard & Poors Rating Category
AAA AA A BBB BB B
Times Interest Earned (X) 27.3 18.0 10.4 5.9 3.4 1.5
EBITDA / Interest (X) 31.0 21.4 12.8 7.6 4.6 2.3
Pre-tax Return on Capital (%) 25.2 25.4 19.7 15.1 12.5 8.8
Debt as % Capital (%) 12.6 36.1 38.4 43.7 51.9 74.9
Number of companies 6 15 118 213 297 345
IV. Debt and Times Interest Earned Ratios for Selected Industries
AAA AA A BBB BB
Food Processing
Debt % Capital 44% - 51% 54% 53%
Times Interest Earned 7.9 - 6.7 4.3 2.9
Electrical Equipment
Debt % Capital - - 36% 48% 72%
Times Interest Earned - - 7.3 3.2 1.6
Electric Utilities
Debt % Capital - 46% 54% 57% 73%
Times Interest Earned - 4.0 3.4 2.7 2.0
Guide Questions:
1 If you were Mr Vincent, EVP of Monmouth Inc, would you try to gain control of Robertson Tool in May 2003?
2 Why is Simmons eager to sell its Robertson position to Monmouth for $50 per share? What are the concerns of and alternatives
for each of the other groups of Robertson shareholders?
3 What is WACC of Robertson Tool using CAPM? Carefully consider which equity value you will use:
- Current
- Prospective with synergy values
- Required value to get transaction done (see question 7)
4 What is maximum price Monmouth can afford to pay using DCF? Use company forecast on Exhhibit 4. Run the valuation
as of the start of 2003. Is this a reasonable forecast? Why or why not? If not, what changes would you make?
5 For comparison, run a DCF of Robertson using sales growth on Exhibit 4 but without synergies/margin improvements.
Compare this value to #3 above.
6 What is maximum price Monmouth should pay based on market multiples of EBIAT? Use 2002 numbers for
Robertson. Would your answers change if you modify the 2002 Robertson EBIAT based on margin improvements
anticipated by Monmouth?
7 What offer would you make to gain the support of the Robertson family and the great majority of the stockholders?
Will you offer to give away all the expected synergy values/margin improvements, why or why not?
Question 1 Yes, due to extensive distribution and the ability to be the market leader by generating 6 - 7% sales growth per year.
question 2
WACC = 7.839024
Actual Forecasts
Without synergy
2002 2003 2004 2005 2006 2007 to Infinity
Sales 55.30 58.60 62.10 65.90 69.80 69.80
COGS 38.16 40.43 42.85 45.47 48.16 48.16 0.69
Gross Profit 17.14 18.17 19.25 20.43 21.64 21.64
SG&A 0.00 12.89 13.66 14.50 15.36 15.36 0.22
Depreciation 2.10 2.30 2.50 2.70 2.90 2.90
EBIT 15.04 2.97 3.09 3.23 3.38 3.38
Tax @ 40% 6.02 1.19 1.24 1.29 1.35 1.35
EBIAT 9.03 1.78 1.85 1.94 2.03 2.03
Add depreciation 2.10 2.30 2.50 2.70 2.90 2.90
WCR 24.00 25.43 26.95 28.60 30.29 30.29 0.43
Less change in WCR 1.43 1.52 1.65 1.69 0.00
Less Net Capex 4.00 3.50 3.60 3.80 2.90
Cash flow from assets -1.35 -0.67 -0.61 -0.56 2.03
Terminal Value 25.68608
Free cash flow -1.35 -0.67 -0.61 -0.56 27.72
DCF -1.249108 -0.571692 -0.486052 -0.415643 18.95012