Question

List the two types of assets that companies own.    

What are assets-in-place? How can their value be estimated?

What are non-operating assets? How can their value be estimated?

What is the total value of a corporation? Who has claims on this value?

The first acquisition target is a privately held company in a mature industry. The company currently has free cash flow of $20 million. Its WACC is 10% and it is expected to grow at a constant rate of 5%. The company has marketable securities of $100 million. It is financed with $200 million of debt, $50 million of preferred stock, and $210 million of book equity.

What is its total corporate value? What is its value of equity?

What is its value of operations?

What is its MVA (MVA = Total corporate value – Total book value)?

The second acquisition target is a privately held company in a growing industry. The target has recently borrowed $40 million to finance its expansion; it has no other debt or preferred stock. It pays no dividends and currently has no marketable securities. NEWPOINT expects the company to produce free cash flows of -$5 million in one year, $10 million in two years, and $20 million in three years. After three years, free cash flow will grow at a rate of 6%. Its WACC is 10% and it currently has 10 million shares of stock.

What is its terminal (horizon value)? What is its current value of operations (i.e., at time zero)?

What is its value of equity on a price per share basis?

NewPoint is also interested in applying value-based management to its own divisions.

Explain what value-based management is.  

What are the four value drivers? How does each of them affect value?

What is expected return on invested capital (EROIC)? Why is the spread between EROIC and WACC so important?   What is the EVA?

NewPoint has two divisions. Both have current sales of $1,000, current expected growth of 5%, and a WACC of 10%. Division A has high profitability (OP=6%) but high capital requirements (CR=78%). Division B has low operating profitability (OP=4%) but low capital requirements (CR=27%). What is the MVA of each division, based on the current growth of 5%? What is the MVA of each division if growth is 6%?

What is the EROIC of each division

Answer 1

Ans: Types of assets that companies own:

1) Tangible Assets ,2) Non Tangible assets

Asstes in Place : The securities, Real estate, and other property that a company already owns i.e. company need not required to buy it, the value of the same can be calculated using the replacement cost of these assets based on their market values.

Non- operating assets are those, which are not useful/required in day to day activity like cash, marketable securities, vacant land, loans receivable etc. Their value can be estimated again based on their market values like in case of land , its market value should be reflecting, for marketable securities securities exchange will let you know the value,

We can calculate the total value of corporate or enterprise value

EV = Total equity (like commmon, preffered, minority interest, quasi equity) + Debt (unfunded pension liabilities) - non operating assets (like cash and cash equivalents and value of associates)

Claims on this value is ranked like all employees (unpaid salary/pension)creditors(secured and unsecured), preffred equity, shareholders, promoters.