Question

All one question. Part 1 is background info on the company and is asking to "estimate the price GCL may get for Fleet as of January 1, 2008"?
GCL Industries is an industrial conglomerate undergoing restructuring. As part of its restructuring program GCL is considering the sale of its low-growth Fleet Meat Packing unit. Fleet is in the high volume-low margin meatpacking business. Fleet's volume sales are not expected to increase in the future and the long-term growth of dollar sales is projected at 3% per year. Operating projections and other pertinent data are presented below. Estimate the price GCL may get for Fleet as of January 1, 2008

This is part 2 of the same problem. It is asking "is the result different from that obtained in the first part of this problem"?

I do not know how to solve this. Any guidance will be greatly appreciated. Thank you

Answer 1

Valuation method 1	FCFF
Long term growth rate	3%
Cost of debt Pre-tax	7%
Tax rate	38%
Cost of debt Post-tax	4.34%
Cost of equity	14.21%
=4.5%+1.32*(4.4%)+3.9%
Debt %	50%
Equity %	50%
WACC	9.27%

Year	2007	2008	2009	2010	2011	2012	2013 onwards
Period	0	1	2	3	4	5	6
Sales	2223.2	2245.6	2284.2	2308.2	2550	2616.7
EBITDA margin	2.55%	2.57%	2.65%	2.71%	2.71%	2.71%
EBITDA margin	56.69	57.71	60.53	62.55	69.11	70.91
Depreciation	29	32.6	34.2	32.9	32	31.5
Increase in deferred tax	0.5	1.6	2.2	2.9	2.5	2.5
CAPEX+ Net WC increase	38.7	41.8	42.2	33.4	32.5	32.5
FCFF	7.47	6.37	8.33	17.88	22.51	23.44	384.74
PV	7.47	5.83	6.97	13.71	15.78	15.04	225.98
Total PV of FCFF (2008 onwards)	283.31

Valuation method 2	EBITDA multiple
Industry average multiple	6 times
Company EBIDTA (2007)	56.69
Company valuation=	340.15
=EBITDA * average EBITDA multiple
Average of 2 valuation methods	311.73
Projected value of company=	311.73

This value is influenced by the cost structure of purchasing company since the WACC is execpted to be influences by 50-50 debt equity structure

New WACC for prospective buyer
Cost of equity	11.30%
=4.5%+0.66*(4.4%)+3.9%

Year	2007	2008	2009	2010	2011	2012	2013 onwards
Period	0	1	2	3	4	5	6
Sales	2223.2	2245.6	2284.2	2308.2	2550	2616.7
EBITDA margin	2.55%	2.57%	2.65%	2.71%	2.71%	2.71%
EBITDA margin	56.69	57.71	60.53	62.55	69.11	70.91
Depreciation	29	32.6	34.2	32.9	32	31.5
Increase in deferred tax	0.5	1.6	2.2	2.9	2.5	2.5
CAPEX+ Net WC increase	38.7	41.8	42.2	33.4	32.5	32.5
FCFF	7.47	6.37	8.33	17.88	22.51	23.44	290.69
PV	7.47	5.72	6.72	12.97	14.66	13.72	152.89
Total PV of FCFF (2008 onwards)	206.68

The cost of equity is higher. Hence, without leverage, the WACC is higher when only funded through equity structure. As a result, the Firm value for the buyer with new capital structure will be lower, if they wish to restructure the acquired company as per their current capital structure