John Case Corporation – Suggested Study Questions
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John Case Corporation
Suggested Study Questions
How would you characterize the business risk of the John Case Corporation? Is it high? Is it low?
Evaluating Case Companys business risk is low.
As of 1984 64 percent market share
Over past 5 years sales have grown 7 percent compounded
Management is able to minimize inventory buildup and 95 percent of sale consist of reorders.
Captured a market niche in which is able to predict purchase order for the next year
Product specialization
Strong operating margin
Given the business risk of the firm, could the prospective buyers finance this transaction with substantial amount of debt?
Was the firm successful in the past?
Over past 5 years sales have grown 7 percent compounded
Profitable since inception with an average invest capital of 20%.
Has the leading market share estimated to 60% to 65%
How does the firms recent performance compare with its peers?
Comparative multiples: Higher net earning, net profit margins,
Moderate sales
Median debt to capital 30%
Estimate the value of John Case Corporation using the adjusted present value method based on data presented in Exhibit 7 and the following assumptions:
Cost of unlevered equity is 14%
Unlevered cash flows will grow at 5% per year beyond the last year of Exhibit 7
Interest expense will be constant at $800,000/year beyond the last year of Exhibit 7
The firms cost of debt is 10% and its tax rate is 25%
Assuming venture capitalists will cash in their equity stake in 6 years, calculate the cash flows for their investment of debt with warrants. Assume their required rate of return is 22% and that the coupon on the debt is 9%.
Is it possible for the prospective buyers to buy the firm with just $500,000 of their money, retain control (more than 50% ownership), and at the same time provide the venture capitalists with a 22% return for their investment? (Assume that the firm will be bought for $20 million).