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CYBERPROBLEM Please go to the ThomsonNOW Web site to access any Cyberproblems. PROBLEM Please go to the ThomsonNOW Web site to access any Thomson ONE—Business School Edition problems. muinicase You have been hired as a consultant to Kulpa Fish- ing Supplies (KFS), a company that is seeking to increase its value. The company’s CEO and founder, Mia Kulpa, has asked you to estimate the value of two privately held companies that KFS is considering acquiring. But first, the senior management of KFS would like for you to explain how to value companies that don’t pay any dividends. You have structured your presentation around the following questions: a. List the two types of assets that companies own. b, What are assets-in-place? How can their value be estimated? ¢. What are nonoperating assets? How can their value be estimated? d. What is the total value of a corporation? Who has claims on this value? ce. 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 percent and it is expected to grow at a constant rate of 5 percent. 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. (1) What is its value of operations? (2) What is its total corporate value? What is its value of equity? (3) 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 392 Part2 Compote Valuation 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. KFS expects the company to produce free cash flows of ~$5 million in 1 year, $10 million in 2 years, and $20 million in 3 years. After 3 years, free cash flow will grow at a rate of 6 percent. Its WACC is 10 percent and it currently has 10 million shares of stock. (1) What is its horizon value (that is, its value of operations at Year 3)? What is its current value of operations (that is, at time zero)? (2) What is its value of equity on a price per share basi KFS 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 expected ROIC and WACC so important? KFS has two divisions. Both have current sales of $1,000, current expected growth of 5 percent, and a WACC of 10 percent. Division A has high profitability (OP = 6%) but high capital requi ments (CR = 78%). Division B has low profitability (OP = 4%) but low capital require- ments (CR = 27%). What is the MVA of each division, based on the current growth of 5 per- cent? What is the MVA of each division if growth is 6 percent? k. What is the expected ROIC of each di 5 percent growth and for 6 percent growth? How is this related to MVA? 1. The managers at KFS have heard that corporate governance can affect shareholder value. List for them the two primary mechanisms of corporate governance, m, Why is entrenched management potentially harmful to shareholders? on for n, List three provisions in the corporate charter that affect takeovers. ©. Explain the difference between insiders and out- siders on the board of directors. What are inter- locking boards? p. What is a stock option in a compensation plan? SELECTED ADDITIONAL REFERENCES AND CASES For an explanation of corporate valuation, see Daves, P., M. Ehrhardt, and R. Shrieves, Corporate Valuation: A Guide for Managers and Investors (Mason, OH: Thomson/South-Western, 2004). For explanations of corporate valuation and value- based management, see Koller, Tim, Mare Goedhart, and David Wessels, Valuation: Measuring and Managing the Value of Companies, 4th ed. (Hoboken, NJ: John Wiley & Sons, 2005). Martin, John D., and J. William Petty, Value Based Management: The Corporate Response to the Shareholder Revolution (Boston: Harvard Busi- ness School Press, 2000). McTaggart, James M., Peter W. Kontes, and Michael C. Mankins, The Value Imperative (New York: The Free Press, 1994). Stewart, G. Bennett, The Quest for Value (New York: Harper Collins, 1991). For additional discussions of corporate governance, Carpenter, Jennifer, and David Yermack, Editors, Executive Compensation and Shareholder Value (Boston: Kluwer Academic Publishers, 1999). For more on EVA and performance, see Peterson, Pamela P, and David R. Peterson, Com- pany Performance and Measures of Value Added (The Research Foundation of the Institute of Chartered Financial Analysts, 1996). The following cases from Textchoice, Thomson Learning's online library, cover many of the con- cepts discussed in this chapter and are available at bttp:// Klein-Brigham Series: Case 41, “Advanced Fuels Corporation,” and Case 74, “Electro Technology Corporation,” dis- cuss financing and valuing a new venture. Brigham-Buzzard Se Case 14, “Maris Distributing Company,” dis- cusses valuation techniques used in a court case. Chapter 11. Corporate Value and Value Based Management» 393