Strategic Financial Decision Policy

PGDM – V Trimester

Assignment # 1:

Case:
You have been hired as a consultant to Kulpa Fishing 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?

c. What are non-operating assets? How can their value be estimated?

d. What is the total value of a corporation? Who has claims on this value?

e. 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% and it is expected
to grow at a constant rate of 5%. 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)?

f. The second acquisition target is a privately held company in a growing industry.

The target has 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%. Its WACC is 10% 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 basis?

g. KFS is also interested in applying value-based management to its own divisions.

Explain what value-based management is.

h. What are the four value drivers? How does each of them affect value?
i. What is expected return on invested capital (EROIC)? Why is the spread between
EROIC and WACC so important?

j. KFS has two divisions. Both have current sales of $1,000, current expected growth of
5%, and a WACC of 10%. Division A has high profitability (OP_ 6%) but high capital
requirements (CR _ 78%). Division B has low profitability (OP_ 4%) but low capital
requirements (CR _ 27%). What is the MVAof each division, based on the current growth
of 5%? What is the MVA of each division if growth is 6%?

k. What is the EROIC of each division for 5% growth and for 6% growth? How is this
related to MVA?

Question 1:
Discuss the best practices in corporate governance.

Question 2:
Explain briefly (a) Marakon approach (b) Alcar approach (c) Mckinsey approach