Advanced Corporate Finance Final Exam (Fall 2019)

Professor Jay Dahya

Instructions

1. Please read instructions carefully, following all instructions will earn you maximum points!

2. This is a take-home exam. You must work on the project independently without any help from anyone
else – this is part of the Honor Code. You are free to consult textbooks and lecture notes and slides.
You are not allowed to use any other information source. (The exam folder will be available at
12.01am on Tuesday 10th December 2019 and close at 11.59pm on Friday 13th December 2019.)

3. You should present your answer in a single Excel workbook. I have enclosed an empty workbook that
you may use. Make sure that you save the workbook with your FULL NAME and upload the file BEFORE
11:59pm on Friday 13th December 2019 electronically via the Final Exam folder link in Canvas. You are
encouraged to submit your work earlier than the deadline. The contact information is as follows:

Your file must be named in the following format: [last name] [first name].xlsx.

4. Use as much information from the case and the assignment as possible. If you need additional
information that is not given, please make reasonable assumptions and justify them. If you feel that
some information in the case/assignment is ambiguous, make your own interpretation.

5. I will not answer questions regarding the exam questions before you submit your work. Please note
that understanding and interpreting the information given in the case is part of the exam.

6. The Final Exam folder link will close at 11.59pm on Friday 13th December 2019. You will fail the course
if you do not submit your exam on time. Failure to follow other instructions will result in point
reductions.

7. Please save your file as it stands at submission on your computer till after grades are settled.
 Final Exam Case: Bidding for Hertz - Leveraged Buyout

Provided
CASE - Bidding for Hertz: Leveraged Buyout (Darden)

SPREADSHEET – Bidding for Hertz: Leveraged Buyout (Darden) – Supporting Spreadsheet

Assignment (Complete all parts 1 through 9)

1. [30 points] Using the APV valuation method, estimate the value of Hertz to the bidding group
led by Carlyle. In your answer, you should clearly identify the assumptions and limitations of
your analysis.
a. Valuation should take place at the end of 2004. Mid-year adjustments are not
necessary.
b. Unlevered cash flows are estimated to grow at a conservative estimate of 0.75%
annually from 2010 onward.
c. Assume that the level of debt will remain constant from 2010 onward.
d. The equity risk premium is estimated at 5%.
e. All cash for Hertz is assumed to be operating cash so net debt and total debt are equal.
f. The marginal tax rate for Hertz is 36%.
g. Ignore transaction costs.

2. [10 points] How does the valuation in [1] compare to the valuation data provided in the case on
multiples? Explain any key variances between the two valuation approaches

3. [10 points] Does Hertz make a good LBO target? Explain the reasoning behind your response.

4. [10 points] Estimate the rate of return that the investor group led by Carlyle can expect to earn
on the buyout assuming a $2.3 billion equity investment. Use date in the case and any necessary
calculations to compute the IRR.

5. [10 points] Does an equity investment of $2.3 billion win the bid or can the bidding group led by
Carlyle bid higher, and how much higher, if private equity investors require a 25% return on
large buyouts? Support your response with relevant calculations and explanations.

6. [5 points] Assume all else constant, does your response to [1] change if the investor group
requires a dividend recap of 20% of net income in each year from 2005 through 2010? Support
your response with relevant calculations and explanations.
7. [5 points] Assume all else constant, does your response to [1] change if the investor group
chooses to substitute ordinary equity with hybrid instruments? Support your response with
relevant calculations and explanations.

8. [10 points] Offer a recommendation on possible incentive devices that might be implemented
by the corporate board at Hertz following the buyout that will align the interests of the CEO and
equity investors.

9. [10 points] Does an IPO or LBO generate the greatest value to Ford? Explain your answer.