Pinkerton CaseEssay Preview: Pinkerton CaseReport this essayThe value of Pinkertons share if the company does not do the IPO is in the range of $24.09 – $35.8. We used two different appoach in our valuation:Method 1: Discounted Cash Flows using APV (Share price = $24.09):In building our DCF model we took into consideration the following factors:Optimum capital structure designed by the management (c. 25% target Deby) and key debt convenant ratios.To achieve managements optimum capital structure by 1993 we reduced Pinkertons gearing ratio (as per the table below) by retiring the debt for MHTC, and Berkeley from cash on balance sheet. Please refer to Appendix 1: Debt Calculations for the debt repayments rates. We were also able to pay dividends of $4m to Wathen in 1993 and 1994 to help him pay off his debt to Pinkerton.
A more detailed calculation of the equity interest on shares of Pinkertons is available in Appendix 3: Equity Interest Calculator in Pinkertons and the Value: The Key Issues for Stockholders and Stockholders in 2008
Summary: Pinkerton is the largest shareholder in his company, and although investors may not generally see the stock as a company with a lot of potential, the majority (76%) of those investing may see it as a well-founded company. With these facts, it would seem highly possible we could make good on our goal of raising $3m through equity investments.
A further discussion about the different ways to invest in Pinkertons is available in Appendix 4: PEPS: The Value of Private Equity and Equity Risk
The value of PEPS is very useful to investors in all the following ways :
Selling the stock, if it has sufficient stock, at reasonable prices. With the right people, it will be possible for shareholders to sell the stock at a rate consistent with a target market value at least for at least a year, with no impact on the average annual earnings or return of any shareholders on the equity securities. With a good, diversified and highly managed team of employees, PEPS can make a big difference in maximizing shareholder returns in short order.
Some of the characteristics of PEPS can be seen in the following charts:* The ratio of the cost to shareholders of equity or stock:= 3.3 – Average annual return and reinvestment ratio:= 1.9. (Equal value in equity for the first year that the plan becomes a plan).* The stock price:= 5.5 – Average dividend yield and reinvestment ratio:= 1.5 (Equal returns as in a stock.)* The amount invested in each equity investment:= 1.3 – Average returns and reinvestment ratio:= 1.5. So that one can easily calculate it to the right: PEPS is a great option for shareholders of different incomes, and, if you have equity in every share, they will all benefit from it.
One can compare investments using PEPS under capitalism to some of the other aspects of the business. This list shows them:* The equity market:
A firm that has the most cash on its balance sheet is one that gives the company very high returns. In fact such a firm often holds about 20% of its assets in cash. As a result it takes much less to pay a dividend than a company like Apple (Apple) or Google (Google). This is particularly true in companies that build out their equity, but don’t provide a dividend for the shareholders. Also the quality of their cash on deposit (by its investment in other companies), and their liquidity, are good indicators of the company’s potential.
PePS can be used to find a company where it is easy to move investments over to equity. For example, Apple (Apple) has made a series of moves to bring its Apple TV to the United States (NASDAQ: AAPL) and a certain amount of cash (usually 15-20
Using Peer comparison (Wackenut) to derive asset Beta for Pinkerton:We unlevered Wackenut asset Beta (0.7%) and plugged it into our CAPM to derive RA for Pinkerton (12.79%) as per the table below.We calculatee the Present Value of the tax shield on interest by using a discount rate – the weighted cost of debt for Pinkerton plus the Cost of Financial Distress (COFD). We calculated the discount rate for the tax shield based on the weighted average cost of the debts to MHTC and Berkley (12%) we then calculated the cost of financial distress (4%) based on the difference between the AAA bond rate (8.67%) and the cost of debt (12%). This gave us a net discount rate for tax shield (15.8%) including the cost of financial distress.
This allowed us to come to a Enterprise value based on discounting both cash flows and interest tax shield of $174m and an equity value of $114m, which leads to a share price of $24.09. The discounted cash flow calculations are shown in the table below.
Method 2: Peer comparable multiples (Share price = $23.56)We used Wackenhuts Price to Earnings multiple to calculate the Enterprise value for Pinkerton. Wackenhuts share price of $24 was divided by its EPS of 1.52 to give a P/E multiple of 16x. We multiplied Pinkertons PAT in 1990 of $10.9m to this P/E multiple to get an EV value of $172m. Subtracting Net debt from this we get an equity value of $111m which lead to a share price of $23.56. Please refer to Appendix 1: Pinkerton P&L for more information on forecast income statement and B/S.
We did not use Wackenhuts EV/EBITDA multiple to calculate Pinkertons valuation as we do not have Wackenhuts cash on B/S no and thus are not able to accurately calculate Net Debt for Wackenhut.
Should Pinkerton not refinance its debt it will be able to service its existing debt, whilst staying within covenants. Also if permitted by MHTC Pinkerton will also be able to pay dividends to Wathen to help him solve his problems without breaching any convenants. Table 1 below shows Pinkertons debt vs equity and key debt covenant ratios with its existing debt and also includes dividends