Problem 1 – Cost of Capital (50 Marks)Please select from the list of companies below to complete this problem. In addition to the company’s investor relations webpage you may use other finance-related resources (e.g. Yahoo! Finance). GROUP A COMPANIES (Consumer Goods – Textile – Apparel Clothing) Columbia Sportswear Company (COLM) o http://investor.columbia.com/financials.cfm Ralph Lauren Corporation (RL) o http://investor.ralphlauren.com/phoenix.zhtml?c=65… Capri Holdings Limited (CPRI) o http://www.capriholdings.com/corporate-overview/de… GROUP B COMPANIES (Consumer Goods – Toys & Games and Entertainment – Diversified) Mattel Inc. (MAT) o https://mattel.gcs-web.com/investor-relations Hasbro Inc. (HAS) o https://investor.hasbro.com/investor-relations The Walt Disney Company (DIS) o http://thewaltdisneycompany.com/investors

mgt_339___assignment__080119_.pdf

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MGT 339 – INDIVIDUAL ASSIGNMENT

Due by Monday, August 12th, 2019 (11:59pm) (e-mail to the instructor)

Please submit a cover page. You will find the template on the course portal.

There are 100 available marks. (Please show your work in detail.)

Problem 1 – Cost of Capital (50 Marks)

Please select from the list of companies below to complete this problem. In addition to the company’s investor

relations webpage you may use other finance-related resources (e.g. Yahoo! Finance).

GROUP A COMPANIES (Consumer Goods – Textile – Apparel Clothing)

Columbia Sportswear Company (COLM)

o

Ralph Lauren Corporation (RL)

o

http://investor.columbia.com/financials.cfm

http://investor.ralphlauren.com/phoenix.zhtml?c=65933&p=irol-irhome

Capri Holdings Limited (CPRI)

o

http://www.capriholdings.com/corporate-overview/default.aspx

GROUP B COMPANIES (Consumer Goods – Toys & Games and Entertainment – Diversified)

Mattel Inc. (MAT)

o

Hasbro Inc. (HAS)

o

https://mattel.gcs-web.com/investor-relations

https://investor.hasbro.com/investor-relations

The Walt Disney Company (DIS)

o

http://thewaltdisneycompany.com/investors

Optional: You may refer to a past winning CFA Investment Research Challenge report for ideas.

https://www.cfainstitute.org/en/societies/challenge/past-champions

Page 1 of 5

MGT 339 – INDIVIDUAL ASSIGNMENT

Due by Monday, August 12th, 2019 (11:59pm) (e-mail to the instructor)

Complete this problem twice by choosing 2 companies (i.e. 1 from Group A and 1 from Group B).

You work in the corporate finance and treasury department and have just been assigned to the team estimating

the company’s WACC. You must estimate this WACC in preparation for a team meeting later today. You quickly

realize that the information you need is readily available online.

1. Go to the Yahoo! Finance website, http://finance.yahoo.com/ . Under “Market Data,” you will find the

yield to maturity for 10-year treasury bonds. Collect this number as your risk-free rate.

2. In the box, “Quote Lookup”, type in the company’s ticker symbol and press enter. Once you see the basic

information, find and click on “Key Statistics”. From the key statistics, collect the information for the

company’s market capitalization (its market value of equity), enterprise value (market-value equity + net

debt) (note: enterprise value is the total market value of a firm’s equity and debt, less the value of its cash

and marketable securities), cash and beta.

3. To get the cost of debt, you will need the yield to maturity on the firm’s existing long-term bonds. Go to

the Financial Industry Regulatory Authority’s website, www.finra.org , click on “Investors” and then, under

“Market Data Center,” click on “Bonds.” Under “Search,” click on “Corporate” and type in the ticker

symbol. A list of the company’s outstanding bond issues will appear. Find the yield to maturity for your

chosen bond issue (i.e. close to 10 years from maturity) (it is in the column titled “Yield”) and use this as

your pre-tax cost of debt. (Note: If this information is not available or hard to obtain with FINRA then use

as a reference, comparable companies with similar credit ratings.)

4. Compute the weights for equity and debt based on the market value of equity and market value of debt.

5. Calculate the company’s cost of equity capital using the CAPM, the risk-free rate you collected, and a

market risk premium of 5%. If the company has preferred shares, you will need to consider cost of

preferred shares.

6. Assume that the company has a tax rate of 35%, calculate the effective (after-tax) cost of debt capital.

7. Calculate the company’s WACC using the market value of equity and debt.

8. Calculate the company’s net debt by subtracting its cash (collected in step 2) from its debt. Recalculate

the weights for the WACC using the market value of equity, net debt, and enterprise value (note:

enterprise value is the total market value of a firm’s equity and debt, less the value of its cash and

marketable securities). Recalculate the company’s WACC using the weights based on the net debt. How

much does it change?

9. How confident are you of your estimates in steps 7 and 8? Which implicit assumptions did you make

during your data collection efforts?

Page 2 of 5

MGT 339 – INDIVIDUAL ASSIGNMENT

Due by Monday, August 12th, 2019 (11:59pm) (e-mail to the instructor)

Problem 2 – Firm Valuation and M&A (50 Marks)

(Please use an Excel Spreadsheet to solve this problem.)

You are the CFO of GreatFood, a large chain of grocery stores. It is the first week in December, and you are

planning to expand your business by acquiring the GoodWine winery that has recently been put up for sale by the

owners. You think that this acquisition may turn out to be a good investment so you want to have solid financial

background for the deal to present at the upcoming Shareholders Meeting in late December 2019. You have the

following information about the GoodWine winery (the “Target”) and your firm (the “Acquirer”).

GoodWine winery (“Target”)

Some important accounting numbers projected for the next 5 years are as follows (all numbers are before-tax, as

of the end of the fiscal year and in $ thousands):

2020

2021

2022

2023

2024

2327.0

2863.0

2984.0

3447.0

3743.0

EBITDA

581.8

715.8

746.0

861.8

935.8

Capital expenditures

500.0

350.0

200.0

180.0

150.0

50.0

60.0

65.0

70.0

75.0

175.0

180.3

185.7

191.2

197.0

Sales

Increase in NWC

Depreciation

After year 5, the winery’s free cash flow (FCF) will grow at an annual rate of 3% into perpetuity. There are 200

thousand shares outstanding. The market value of equity is currently $3,500 thousand and the market value of

outstanding debt is $450 thousand (assume that the share price, the value of equity, and the value of debt are

given at the valuation date, i.e. end of December, 2019). The firm faces the (marginal) tax rate of 40%. The asset

beta of the target (the beta of the same but all-equity firm) is 1.15.

GreatFood (Acquirer)

The acquirer expects to have the following estimated synergies from the M&A and all figures are before-tax, as of

the end of the fiscal year and in $ thousands:

Synergies

EBITDA

2020

2021

2022

2023

2024

134.0

150.0

171.0

216.0

223.0

After year 5, the free cash flow (FCF) from synergies will grow at an annual rate of 2% into perpetuity. The firm

faces the (marginal) tax rate of 40%. The asset beta of the acquirer (the beta of the same but all-equity firm) is

0.8.

Note: The fiscal years of both your firm and the target end on December 31 (i.e. all projected numbers are given at

the end of the fiscal year starting from exactly one year from the date of valuation).

Page 3 of 5

MGT 339 – INDIVIDUAL ASSIGNMENT

Due by Monday, August 12th, 2019 (11:59pm) (e-mail to the instructor)

Information about the deal/market conditions

The target leverage (D/V) after the deal is completed is expected to be 25% (applies to both the target and the

synergies). The borrowing rate (cost of capital) is 8% and the Treasury bond rate (risk-free rate) is 3%. The market

risk premium is 5%.

1.1. What is the maximum price per share that your firm can pay for the target based on DCF and APV methods?

You can build your analysis on the following steps in your valuation:

a) Estimate the value of the levered target firm:

a. Calculate the cost of assets (unlevered equity return, i.e. cost of equity of the same but all-equity

firm) for the target using CAPM

b. Calculate the cost of equity (levered equity return) for the target

c. Calculate the weighted average cost of capital (WACC) for the target

d. Estimate free cash flow (FCF) for years 2020-2024

e. Calculate the terminal value in 2024 using the APV method and the WACC method separately

f. Calculate the value of the levered target firm using the APV method (Hint: since leverage is

expected to change, D*t is not an appropriate way of estimating tax shields – derive tax shields

from the relation between the levered and unlevered values of the firm)

g. Calculate the value of the levered target firm using the WACC method

b) Calculate the value of synergies:

a. Calculate the cost of assets for the acquirer using CAPM

b. Calculate the cost of equity (levered equity return) for the acquirer

c. Calculate the weighted average cost of capital (WACC) for the acquirer

d. Estimate free cash flow (FCF) from synergies for years 2020-2024 using beta and growth rate of

the acquirer

e. Calculate the terminal value of synergies in 2024 using the APV method and the WACC method

separately

f. Calculate the value of the levered synergies using the APV method (do not forget about the tax

shields)

g. Calculate the value of the levered synergies using the WACC method

c) Find the value of the target’s equity to the acquirer:

a. Calculate the value of the levered target to the acquirer by adding the value of synergies to the

value of the levered target firm

b. Subtract the amount of outstanding debt to get the value of equity

d) Calculate the maximum price per share that the acquirer can pay for the target

1.2. If your firm announces the deal in December 2019, what is the expected return on the target’s equity at the

announcement (based on both DCF and APV methods)?

Page 4 of 5

MGT 339 – INDIVIDUAL ASSIGNMENT

Due by Monday, August 12th, 2019 (11:59pm) (e-mail to the instructor)

Hint: The following relationship will be useful for you in Problem 2.

D

D

PV (TS ) VL TC and VL VU PV (TS ) => PV (TS ) VU PV (TS ) TC

VL

VL

D

D

D

D

TC PV (TS ) TC => 1 TC PV (TS ) VU TC

VL

VL

VL

VL

=> PV (TS ) VU

D

VU TC

VL

=> PV (TS )

D

1 TC

VL

Page 5 of 5

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