Weighted Average Cost of Capital and Yeats

Extra source Assignment Yeats Valves and Controls Inc. Completed as a Group with the Fol milding Individuals (in alphabetical fellowship by last name) Adetunji Adeniyi Tung F. Cheng Gregory Chiu Rashmin Patel WenHao Zhang hunt Title Accounting and Finance melody No. /Section MG6093 Instructor impolite X. Apicella November 28, 2012 Yeats Valves Question The following ar questions which should counsel the groups on important aspects of the Yeats Valves show window. personal line of credit the veridical causa name is Yeats Valves and Controls, Inc. The slip compute is UV0094.There is alike a spreadsheet that number is UV0184. As mentioned the corresponding case is TSEInter depicted object Corp. case UV0114. 1. What is the situation that this c every last(predicate)er-up faces? Yeats Valves and Controls, Inc. is currently considering a nuclear fusion with TSE International Corporation. The founder, who is Chair and CEO, W. B. invoice Yeats, is round to reach his 62n d birthday and does non own a succession plan. He is concerned with the future of his society as none of the early(a) executives stack tamp down his place because they argon all specialists. broadsheet Yeats believes that TSE notify provide perceptual constancy to Yeats as he is reaching retirement, and TSE is a larger company with better grocery storeing and global statistical dispersal channels. However, he is concerned with the fit of the deuce companies even though he thinks TSE is a better partnership than different alternatives. 2. What ar the strengths and weaknesses of Yeats and its counterparty, TSE? Unlike TSE, which is more global-oriented with indirect diffusion channels, Yeats has a stronger national and direct distribution channel.TSE has a larger mass mart production system (high volume) while Yeats has a more customized securities industry production (lower volume). In addition, Yeats has a strong R&038D, having numerous patents for multiple applicatio ns, particularly with its latest ripening of the Widening peal Program that has a high-profile g everywherenment contract. This might not be reflected in the stock of the company as a growth opportunity. 3. Why should Yeats and TSE hope to negotiate a fusion make do?Yeats is considering this merger deal because it would laissez passer a succession plan for the company as TSE is a much larger company that can declare Yeats financial stability without having Yeats to identify new capital (debt and paleness) on its own to fund the Widening pealing Program (an advanced hydraulic- tone downs system). Yeats subscribes surplus funding in grade to keep on the R&038D of the Widening bankroll Program. Also, TSE has the expertise of mass manufacturing that Yeats need for siding its reach in commercialized distribution.In order to hold on a competitive edge, Yeats need 2 the finance and manufacturing capabilities of TSE as other competitors in the same industry pose been c onsolidating more and more. However, Bill Yeats is concerned about losing voting control from a merger with TSE. He in addition wants to ensure that Yeats employees are kept after the merger and its stockholders top rate from the merger. He wants TSE to continue the R&038D and commercialization of the Widening Gyre Program and for him to stay on as head of Yeats until TSE can fully make Yeats by ffering him a reasonable grant plan. Though Bill Yeats could turn to other company, Rockheed Marlin, a large defense contractor, or other companies, he prefers TSE because he is well-known(prenominal) with TSE and they commence complementary needs. Bill Yeats also ruled out a control stick venture with TSE because he felt it was an subscript alternative as it provide fork up the same integration issues. To reduce valuate obligations, Yeats and TSE want to complete the merger in a stock-swap deal. 4. Use valuation analytic thinking to determine the valuation of Yeats. What are t he come across rank drivers?As mentioned above Note the Harvard web site has a educatee spreadsheet for Yeats Valves that youshoulduse as the basis for your outline. Questions are contiinued below One way of visualise out valuation of Yeats is through WACC, the Weighted average out Cost of Capital. It is the minimum return a company needs to earn in order to satisfy its investor base (as charge for the amount of debt vs. equity in the propose/capital structure), which is what the company must get investors to raise new financing to place upright new projects or ventures.WACC is particularly effective here because Yeats has no debt, thus, it is an equity financed company. In the case of Yeats, the company must have capital to continue to develop and market its new Widening Gyre Program. The radiation pattern for WACC = Re (E/V) + Rd (D/V)(1-t) However, because Yeats does not have debt, the co enmesh half of this formula, Rd(D/V)(1-t) is not necessary. Being that Yeats has adjust debt, the look on of its equity is in full, which represents its attempt nurture. Tax (t) is determined in the case as 40% or . 40 (p. 5).We must then calculate the CAPM for the live of equity (see Excel sheet for details) Re = Rf + Beta (Rm-Rf) Re = necessitate Return on righteousness Rf = jeopardizeiness Free Rate = 5. 98 (p. 16) Beta = Measure of Risk sex act to the general market (volatility) = 1. 5 (p. 5) Rm-Rf = Equity Market Risk Premium (EMRP) = 5. 5 (p. 16) Rm = Market Risk Rf = Risk Free Assets (U. S. treasury security) With Beta at 1, the stock price changes in meticulous tandem with the market, but with Yeats genus Beta at 1. 5, it is more risky than a group of peer stocks. Thus, Re = Rf + Beta (Rm-Rf) Re = 5. 98 + 1. 5 x 5. 5Re = 14. 23%, the cost of equity at for Yeats Then calculate WACC = Re (E/V) + Rd (D/V)(1-t) WACC = 14. 23 (100%) + 0 (0%) (1-40%) WACC = 14. 23% Addtional Questions for Yeats / TSE cases 5. What do you believe Yeats valves is worth? What key financial assumptions determine the range of high and low values in your valuation analysis? Also, draw on any other valuation approaches and information that you can. With WACC = 14. 23% assuming store Growth Rate = 4% 1) Terminal Value (or present value at a future point) with $ delineated in 1,000 = $7059. 8 (1+4%) (14. 23% 4%) $71771. 1 = $72 trillion 2) DCF (Discounted Cash time period calculated utilize a financial calculator) CF0 = 0 CO1 = 4689. 3 CO2 = 4584. 3 CO3 = 5302. 1 CO4 = 6127. 4 CO5 = 78830. 9 I = 14. 23 NPV = 55306. 17 NPV = $55. 306 million 3) Equity Value= 55,306,170 electronegative Debt= 0 Divided by with child(p) divisions = 1,440,000 or $55,306,170 1,440,000 Equity Value per Share = $38. 407 per share Other valuations can intromit comparing P/E ratios with other peer companies. Also comparable are Price/Revenues, Price/EBIT and Price/EBITDA. take in exhibits 8 and 9 for comparable Ratios of accomplice Firms. 6.What are the advantag es and disadvantages of a combination surrounded by Yeats and TSE Int? The advantages of combining Yeats with TSE would be that Yeats can head R&038D expertise that TSE lacks, and TSE can offer manufacturing and marketing expertise that Yeats lacks. With TSEs commercialized global reach and Yeats national government contracts, it would be expected that thither would be financial synergies that would benefit both companies in the long-term, including cost savings from great purchasing power for materials and components, and application of TSEs Six Sigma for higher quality control savings.This would increase value to stockholders of both organizations and offer diversification. However, the disadvantage would be that the two companies operate differently and entrust have to find a common ground that would free them to merge their cultures. One of the concerns mentioned in the case is that Yeats has a more entrepreneurial achievement that might not fit TSE. twain companies will have to be broad-minded to learn each others methods of operations. 7. What risks do TSE Int. and Yeats Valves face in the proposed merger?Consider a range of transaction, financial and in operation(p) risks. What effect do these risk factors have on the value of Yeats Valves? In the proposed merger, TSE will not want to over pay for the proposed merger while Yeats will not want to be under-valued in the stock swap. Yeats has a concern that TSE whitethorn under-value its Widening Gyre Program, which could be under-estimated by the market price. Bill Yeats wants to stay on to operate Yeats after the merger with a bonus and return to R&038D rather than focusing on fosterage capital.TSE has to know how much value much(prenominal) a transaction will offer TSE being that TSE has very little buzz off in financing R&038D. both(prenominal) companies must consider their differences in operating cultures and the risks involved over the long-term viability of the two companies. TSE must consider how long they will have Bill Yeats as he is nearing retirement at a sentence when TSE might need Bill Yeats to maintain the success of this merger. What long term bonuses may be required to attract Bill Yeats to uphold, and what succession plan might TSE have to come up with for Yeats Inc.?These are all risks to both parties. 8. Develop a negotiating strategy i. e. , an opening hireing price to dish out your company Yeats as well as the price below which you would walk onward from the deal. Justify your pin dead or walk outside(a) price. Being that the Terminal Value is at $72 million, we would ask to sell Yeats to TSE at that opening price. However, in calculating the Discount Cash Flow Value with Net Present Value at $55 million, this would be the drop dead price we would walk away from the deal.A value between these ranges would be preferred, as the minimum ($55 million) represents the equity value of Yeats and the maximum ($72 million) represents the future v alue of Yeats. In addition to the price negotiations, we would also negotiate social terms (as suggested by Bill Yeats). This includes for Yeats employees not to be end after the merger and Bill Yeat to remain as head of Yeats with bonuses (five year options to buy 80,000 shares of TSE stock at 90% of market price at the close of acquisition, and an bonus bonus of $50,000 to $200,000 per year).