Monmouth case study wacc

Week 11 Equity Valuation SEE THE IS/BS MODEL & FLOW DIAGRAM TABS -YOU ARE NO READ: VIDEOS: CASE CFW on Valuation, Chapter 6 The "Big Daddy" Valuation Formula links to videos on Week 11 Bb page A Swinging Attitude for Equity Valuation Success Monmouth, Inc. do not confuse Monmouth and Robertson Tool; examine titles of case exhib Learning Objectives - Apply financial analysis techniques learned so far to size-up a business - Learn how to use and not abuse the Free Cash Flow Equity Valuation Model - Learn how to use and not abuse the Market Multiples Equity Valuation Model - Become aware of the proposition that "equity valuation is an opinion" - Become aware that successful equity analysts know how to "swing it" Assignment Questions ANSWER IN THE TABS 1 Prepare a succinct statement describing Robertson Tool's business risk, making critical j HINT: Consider the volatility of its revenues and operating expenses, therefore appraisin based on the green color-coded parts of the IS-BS Model. 2 What does the Free Cash Flow Equity Valuation model on Q2 tab suggest about the valu HINT: Note that Case Exhibit 4 provides data inputs for the FCF valuation. 3 What does the Market Multiples Valuation model on Q3 tab suggest about the value of M HINT: Case Exhibit 6 provides data inputs for the MM valuation. 4 Considering all of the above, Q1-3, recommend and justify a price for this deal. This is not easy to do. Put yourself in the shoes of the Robertson managers. Who wants it more? The buyer-Monmouth? The seller-Robertson? Who has the strongest negotiating position? Use case facts to guide you. REMEMBER: THERE IS NO SINGLE CORRECT ANSWER IN FINANCIAL ANALYSIS AND DECISION MAKING. THE QUALITY OF YOUR WORK DEPENDS ON THE INTERPRETATION OF MODEL RESULTS COMBINED WITH INFORMATION FROM THE CASE… AND JUDGMENT. DON'T BE AFRAID TO EXERCISE YOUR JUDGMENT! THUMBNAIL SKETCH: BRIEF ANALYSIS DUPONT RATIOS HISTORICAL RATIOS I/S & B/S FORECAST TIE NORMAL DEBT RATIOWORKING CAPITAL I/S, B/S, & RATIOS STOCK PRICE MKT CAP EXTENDED ANALYSIS FULL RATIOS LIQUIDITY LEVERAGE ASSET USE PROFITABILITY VALUATION GROWTH CAPITAL BUDGETING OP & CAP NATCF, NPV, IRR, PAYBACK FINANCING EFN ANALYSIS STEPS: 1-HISTORICAL RATIOS 2-K-WACC 3-CAPITAL BUDGETING 4-FORECAST & EFN 5-EQUITY VALUATION 6-FINANCING VALUATION DEBT EQUITY DEBT EQUITY EBIT CHART income risk control mktblty flexblty timing K-WACC ENTERPRISE VALUE USING FREE CASH FLOW MARKET MULTIPLES: P/E, MV/BV, REV, EBIT INCOME STATEMENT BALANCE SHEET Revenue ASSETS LIABILITIES AND EQUITY Cost of sales Current assets Current liabilities Gross profit Cash Trade payables Other operating income Investments Other accruals Other operating expenses Trade receivables Tax liabilities Total cost and expenses Inventories Short-term loans, leases Operating profit (EBIT) Non-current assets Non-current liabilities Interest, finance costs Property, plant & equipment Loans, debt, leases due after 1 year Profit before tax Investment property Retirement benefit obligation Income tax Goodwill Deferred tax liabilities Net profit after tax Total non-current liabilities Dividends Reinvested in the business Stockholder's equity (Net worth) Preferred stock OPERATING LEVERAGE Common stock Additional paid-in-capital FINANCIAL LEVERAGE Retained earnings Total assets Total liabilities & equity WORKING CAPITAL changes spontaneously with revenue ?what levels of ca, cl, s-t loans? CAPITAL BUDGETING ?which projects to accept? FINANCING ?how much debt capacity? COST OF DEBT K-WACC COST OF EQUITY VALUATION CASH FLOW COST OF CAPITAL Cost of Capital A 1 WEIGHTED AVERAGE COST OF CAPITAL 2 3 4 COST OF DEBT: 5 Coupon Rate 6 Marginal Tax Rate 7 Cost of Debt 8 weight of debt 9 10 COST OF EQUITY: 11 12 13 Risk-Free Rate Equity Risk Premium Beta Cost of Equity weight of equity 14 15 16 17 Weighted-Average Cost of Capital B C D E F G H I CONSIDER THIS AS GIVEN Formula 6.67% given 40.0% given 4.00% b5*(1-b6) 30% 4.10% 6.00% 1.00 10.10% 70%Week 11 Equity Valuation SEE THE IS/BS MODEL & FLOW DIAGRAM TABS -YOU ARE NO READ: VIDEOS: CASE CFW on Valuation, Chapter 6 The "Big Daddy" Valuation Formula links to videos on Week 11 Bb page A Swinging Attitude for Equity Valuation Success Monmouth, Inc. do not confuse Monmouth and Robertson Tool; examine titles of case exhib Learning Objectives - Apply financial analysis techniques learned so far to size-up a business - Learn how to use and not abuse the Free Cash Flow Equity Valuation Model - Learn how to use and not abuse the Market Multiples Equity Valuation Model - Become aware of the proposition that "equity valuation is an opinion" - Become aware that successful equity analysts know how to "swing it" Assignment Questions ANSWER IN THE TABS 1 Prepare a succinct statement describing Robertson Tool's business risk, making critical j HINT: Consider the volatility of its revenues and operating expenses, therefore appraisin based on the green color-coded parts of the IS-BS Model. 2 What does the Free Cash Flow Equity Valuation model on Q2 tab suggest about the valu HINT: Note that Case Exhibit 4 provides data inputs for the FCF valuation. 3 What does the Market Multiples Valuation model on Q3 tab suggest about the value of M HINT: Case Exhibit 6 provides data inputs for the MM valuation. 4 Considering all of the above, Q1-3, recommend and justify a price for this deal. This is not easy to do. Put yourself in the shoes of the Robertson managers. Who wants it more? The buyer-Monmouth? The seller-Robertson? Who has the strongest negotiating position? Use case facts to guide you. REMEMBER: THERE IS NO SINGLE CORRECT ANSWER IN FINANCIAL ANALYSIS AND DECISION MAKING. THE QUALITY OF YOUR WORK DEPENDS ON THE INTERPRETATION OF MODEL RESULTS COMBINED WITH INFORMATION FROM THE CASE… AND JUDGMENT. DON'T BE AFRAID TO EXERCISE YOUR JUDGMENT! THUMBNAIL SKETCH: BRIEF ANALYSIS DUPONT RATIOS HISTORICAL RATIOS I/S & B/S FORECAST TIE NORMAL DEBT RATIOWORKING CAPITAL I/S, B/S, & RATIOS STOCK PRICE MKT CAP EXTENDED ANALYSIS FULL RATIOS LIQUIDITY LEVERAGE ASSET USE PROFITABILITY VALUATION GROWTH CAPITAL BUDGETING OP & CAP NATCF, NPV, IRR, PAYBACK FINANCING EFN ANALYSIS STEPS: 1-HISTORICAL RATIOS 2-K-WACC 3-CAPITAL BUDGETING 4-FORECAST & EFN 5-EQUITY VALUATION 6-FINANCING VALUATION DEBT EQUITY DEBT EQUITY EBIT CHART income risk control mktblty flexblty timing K-WACC ENTERPRISE VALUE USING FREE CASH FLOW MARKET MULTIPLES: P/E, MV/BV, REV, EBIT INCOME STATEMENT BALANCE SHEET Revenue ASSETS LIABILITIES AND EQUITY Cost of sales Current assets Current liabilities Gross profit Cash Trade payables Other operating income Investments Other accruals Other operating expenses Trade receivables Tax liabilities Total cost and expenses Inventories Short-term loans, leases Operating profit (EBIT) Non-current assets Non-current liabilities Interest, finance costs Property, plant & equipment Loans, debt, leases due after 1 year Profit before tax Investment property Retirement benefit obligation Income tax Goodwill Deferred tax liabilities Net profit after tax Total non-current liabilities Dividends Reinvested in the business Stockholder's equity (Net worth) Preferred stock OPERATING LEVERAGE Common stock Additional paid-in-capital FINANCIAL LEVERAGE Retained earnings Total assets Total liabilities & equity WORKING CAPITAL changes spontaneously with revenue ?what levels of ca, cl, s-t loans? CAPITAL BUDGETING ?which projects to accept? FINANCING ?how much debt capacity? COST OF DEBT K-WACC COST OF EQUITY VALUATION CASH FLOW COST OF CAPITAL Cost of Capital A 1 WEIGHTED AVERAGE COST OF CAPITAL 2 3 4 COST OF DEBT: 5 Coupon Rate 6 Marginal Tax Rate 7 Cost of Debt 8 weight of debt 9 10 COST OF EQUITY: 11 12 13 Risk-Free Rate Equity Risk Premium Beta Cost of Equity weight of equity 14 15 16 17 Weighted-Average Cost of Capital B C D E F G H I CONSIDER THIS AS GIVEN Formula 6.67% given 40.0% given 4.00% b5*(1-b6) 30% 4.10% 6.00% 1.00 10.10% 70% given given given b11+(b13*b12) 1-b8 Equation BB Corporate,Ex 7 k-d = I x (1- t) d ÷ d+e judgment guided by case facts 30-yr Treasury, Ex 7 given, Ex 7 avg Accutant,Snap-On,Stanley equity beta; Ex 6 k-e = R-f + [ß x (R-m - R-f)] e ÷ d+e R-m - R-f 8.27% (b8*b7)+(b15*b14)(k-d x wt-d)+(k-e x wt-e) Page 5 J Prepare a succinct statement describing Robertson Tool's business risk, making critical judgments. given given given b11+(b13*b12) 1-b8 Equation BB Corporate,Ex 7 k-d = I x (1- t) d ÷ d+e judgment guided by case facts 30-yr Treasury, Ex 7 given, Ex 7 avg Accutant,Snap-On,Stanley equity beta; Ex 6 k-e = R-f + [ß x (R-m - R-f)] e ÷ d+e R-m - R-f 8.27% (b8*b7)+(b15*b14)(k-d x wt-d)+(k-e x wt-e) Page 5 J Prepare a succinct statement describing Robertson Tool's business risk, making critical judgments.