Essay About Equity Holders And Determination Of The Value Of Pinkerton

Pinkerton
[pic 1]520P: Managerial FinanceCase: Pinkerton Professor: Dr. Nicholas Valerio IIIDate: 07/27/2009Team 21Allison BurbageAugusto SantosSenthil SubramanianChika UmoluDouglas Whitcher1        CPP’S WEIGHTED AVERAGE COST OF CAPITAL        31.1        Calculation of the Return Required by the Equity Holders:        31.2        Final WACC calculation        42        DETERMINATION OF THE VALUE OF PINKERTON – “EXPECTED” SCENARIO        52.1        Parameters and Assumptions        52.2        Cash Flow from assets        52.3        Present Value of Pinkerton – Expected Scenario        63        DETERMINATION OF THE VALUE OF PINKERTON – “PESSIMISTIC” SCENARIO        73.1        Parameters and Assumptions        73.2        Cash Flow from Assets        73.3        Present Value of Pinkerton – Pessimistic Scenario        84        IN THE DEBT PLUS EQUITY FINANCING ALTERNATIVE, WHAT IS THE TRUE VALUE OF THE 45% EQUITY STAKE?        9CPP’s Weighted Average Cost of CapitalWe started by applying the general equation for weighted average cost of capital (WACC):[pic 2] ………………………………..(1)Where,D/V can be calculated from the information given on the comparable firm (Wackenhut)  This value was determined to be 0.131E/V can be calculated as 1-D/Vτ  is the tax rate and is given in the assignment as 34%RD is the prevailing market rate (YTM) on the debt. In this assignment we have been given this value as 10%Calculation of the Return Required by the Equity Holders:The Capital Asset Pricing Model (CAPM) can be used to determine the return required by equity holders:[pic 3] ………………………………..(2)Where,MRP is the market risk premium Rf is the associated risk free rate[pic 4]is the Equity BetaFor this case,MRP = 7.50% (given in the assignment)Rf = 8.58% (taken as the 30 year treasury bond rate)[pic 5]= 0.89 (since we only have 1 comparable company, the equity beta of CPP is taken to be equal to the equity beta of Wackenhut)Final WACC calculationShown below is the detailed outline of the WACC calculation.[pic 6]Determination of the Value of Pinkerton – “Expected” ScenarioParameters and AssumptionsAssumptions – Expected scenario 19881989199019911992Tax rate34.00%     WACC14.12%     Growth rate5.00%     Gross Profit (as % of sales)[1]8.50%9.00%9.50%10.25%10.25%Operating Expenses (as % of sales)[2]6.00%5.90%5.80%5.80%5.80%Increase in CPP Operating Profit[3]0.001.201.502.003.00Level of NWC (as % of sales)[4]8.60%7.40%6.20%6.20%6.20%Level of CapEx (as % of Sales) [5]4.00%4.00%4.00%4.00%4.00%Cash Flow from assetsBased on the revenue numbers from the case and the parameters above we have:Year198719881989199019911992Pinkerton Sales Revenue[6]408.30367.47326.64285.81300.10315.11         Pinkerton Gross Profit 31.2329.4027.1530.7632.30Pinkerton Operating Expenses 22.0519.2716.5817.4118.28         Pinkerton Operating Profit 9.1910.1310.5713.3514.02         Increase in CPP Operating Profit0.001.201.502.003.00         Total Operating Profit 9.1911.3312.0715.3517.02Operating Taxes[7] 3.123.854.115.225.79NOPAT 6.067.487.9710.1311.23       Level of NWC38.8031.6024.1717.7218.6119.54Increase in NWC -7.20-7.43-6.450.890.93Net Increase in NWC -7.20-7.43-6.450.890.93       Level of CapEx17.6014.7013.0711.4312.0012.60NetCapEx (less depreciation) -2.90-1.63-1.630.570.60       Free Cash Flow (CFA) 16.1616.5416.058.689.70