Waltham, Inc. Case Solution
Autor: way2vi3t4u • May 14, 2016 • Case Study • 806 Words (4 Pages) • 1,338 Views
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MASTER OF BUSINESS ADMINISTRATION
FIN 526 – Financial Management
Mini-Case Study 3 – Waltham, Inc.
October 4 , 2015
Thinh Doan
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Introduction
Waltham, Inc. in considering the acquisition of a private company, ArtForever.com. There is considerable dissension among senior management and the board about whether the acquisition should be undertaken. A thorough analysis of the merits of the proposed acquisition is made based on the current and projected financial performance of ArtForever.com, the historical and current performance and organizational structure of similar competitors, as well as the competitive landscape. The recommendation for the appropriate cost for Waltham Inc. to pay in the acquisition of ArtForever.com is detailed in the below analysis.
Analysis
The following data is provided based on ArtForever.com’s financial performance and industry structure:
Market Value of Waltham, Inc.
Ratio to Value | Cost rate | ||
Equity | $5,000,000 | 71.43% | 8% |
Debt | $2,000,000 | 28.57% | 6.2% |
Total | $7,000,000 | ||
WACC | 6.78% |
The average expected return on S&P 500 over the next 30 years as the cost of equity and calculated WACC of Waltham as 6.78%.
In order to provide a substantiated recommendation to Waltham, Inc. about ArtForever.com, multiple financial factors were considered. A summary of this analysis can be found in Exhibit 1 of the attached Excel spreadsheet.
Discount Rate Calculation
The first step in this financial analysis was to decide the appropriate discount rate to be applied for the NPV analysis of ArtForever.com. As mentioned in the case, there is a company, ArtToday.net, whose operating structures are similar to ArtForever.com. ArtToday.net is a public company, implying that much of their financial data is available publicly, including the company stock Beta, ratio to value, amongst other information. The available information from ArtToday.net can be used as a benchmark for ArtForever.com in predicting the results of this case. An analysis of ArtToday.net can be created by applying the YTM of 30 year treasury bonds (2.5%) as the risk-free rate and using the average expected return on S&P 500 over the next 30 years (8%) for market expectation rate to be in the same scale. The cost of equity is calculated as 10.75%. Because of the similarities between the two companies, this rate would be the best reference to be used for an NPV analysis of ArtForever.com.
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