Pinkerton
Autor: hackme1989 • February 24, 2018 • Case Study • 1,330 Words (6 Pages) • 381 Views
[pic 1]
520P: Managerial Finance
Case: Pinkerton
Professor: Dr. Nicholas Valerio III
Date: 07/27/2009
Team 21
Allison Burbage
Augusto Santos
Senthil Subramanian
Chika Umolu
Douglas Whitcher
1 CPP’S WEIGHTED AVERAGE COST OF CAPITAL 3
1.1 Calculation of the Return Required by the Equity Holders: 3
1.2 Final WACC calculation 4
2 DETERMINATION OF THE VALUE OF PINKERTON – “EXPECTED” SCENARIO 5
2.1 Parameters and Assumptions 5
2.2 Cash Flow from assets 5
2.3 Present Value of Pinkerton – Expected Scenario 6
3 DETERMINATION OF THE VALUE OF PINKERTON – “PESSIMISTIC” SCENARIO 7
3.1 Parameters and Assumptions 7
3.2 Cash Flow from Assets 7
3.3 Present Value of Pinkerton – Pessimistic Scenario 8
4 IN THE DEBT PLUS EQUITY FINANCING ALTERNATIVE, WHAT IS THE TRUE VALUE OF THE 45% EQUITY STAKE? 9
CPP’s Weighted Average Cost of Capital
We started by applying the general equation for weighted average cost of capital (WACC):
[pic 2] ………………………………..(1)
Where,
- D/V can be calculated from the information given on the comparable firm (Wackenhut) This value was determined to be 0.131
- E/V can be calculated as 1-D/V
- τ is the tax rate and is given in the assignment as 34%
- RD is the prevailing market rate (YTM) on the debt. In this assignment we have been given this value as 10%
Calculation of the Return Required by the Equity Holders:
The Capital Asset Pricing Model (CAPM) can be used to determine the return required by equity holders:
[pic 3] ………………………………..(2)
Where,
- MRP is the market risk premium
- Rf is the associated risk free rate
- [pic 4]is the Equity Beta
For this case,
- MRP = 7.50% (given in the assignment)
- Rf = 8.58% (taken as the 30 year treasury bond rate)
- [pic 5]= 0.89 (since we only have 1 comparable company, the equity beta of CPP is taken to be equal to the equity beta of Wackenhut)
Final WACC calculation
Shown below is the detailed outline of the WACC calculation.
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Determination of the Value of Pinkerton – “Expected” Scenario
Parameters and Assumptions
Assumptions - Expected scenario | 1988 | 1989 | 1990 | 1991 | 1992 | |
Tax rate | 34.00% |
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WACC | 14.12% |
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Growth rate | 5.00% |
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Gross Profit (as % of sales)[1] | 8.50% | 9.00% | 9.50% | 10.25% | 10.25% | |
Operating Expenses (as % of sales)[2] | 6.00% | 5.90% | 5.80% | 5.80% | 5.80% | |
Increase in CPP Operating Profit[3] | 0.00 | 1.20 | 1.50 | 2.00 | 3.00 | |
Level of NWC (as % of sales)[4] | 8.60% | 7.40% | 6.20% | 6.20% | 6.20% | |
Level of CapEx (as % of Sales) [5] | 4.00% | 4.00% | 4.00% | 4.00% | 4.00% |
Cash Flow from assets
Based on the revenue numbers from the case and the parameters above we have:
Year | 1987 | 1988 | 1989 | 1990 | 1991 | 1992 |
Pinkerton Sales Revenue[6] | 408.30 | 367.47 | 326.64 | 285.81 | 300.10 | 315.11 |
Pinkerton Gross Profit |
| 31.23 | 29.40 | 27.15 | 30.76 | 32.30 |
Pinkerton Operating Expenses |
| 22.05 | 19.27 | 16.58 | 17.41 | 18.28 |
Pinkerton Operating Profit |
| 9.19 | 10.13 | 10.57 | 13.35 | 14.02 |
Increase in CPP Operating Profit | 0.00 | 1.20 | 1.50 | 2.00 | 3.00 | |
Total Operating Profit |
| 9.19 | 11.33 | 12.07 | 15.35 | 17.02 |
Operating Taxes[7] |
| 3.12 | 3.85 | 4.11 | 5.22 | 5.79 |
NOPAT |
| 6.06 | 7.48 | 7.97 | 10.13 | 11.23 |
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Level of NWC | 38.80 | 31.60 | 24.17 | 17.72 | 18.61 | 19.54 |
Increase in NWC |
| -7.20 | -7.43 | -6.45 | 0.89 | 0.93 |
Net Increase in NWC |
| -7.20 | -7.43 | -6.45 | 0.89 | 0.93 |
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Level of CapEx | 17.60 | 14.70 | 13.07 | 11.43 | 12.00 | 12.60 |
NetCapEx (less depreciation) |
| -2.90 | -1.63 | -1.63 | 0.57 | 0.60 |
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Free Cash Flow (CFA) |
| 16.16 | 16.54 | 16.05 | 8.68 | 9.70 |
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