Stock and Long Term Trend

Team 1 Monm out(a)h Case 1. Is Robertson a good scene for Monmouth (assuming the wrong is right)? Why? Yes. Robertson Tool Company had been going through a few years of low gross revenue and profit, and, coupled with conservative pecuniary and accounting practices, was far behind the normal growth rate for companies in its industry. Robertsons 50% control of the market for clamps and vises, a grand with its good sit in the scissors and shears $200 million market, let it laudation the diverse holdings of Monmouth.These are attractive attri just nowes of Robertson, but the dealing point lies in the distribution network consisting of 2,100 wholesalers and 15,000 retail outlets. The Robertson intersection points are sold in 137 countries worldwide. This passageway to market Monmouth and Robertson products across resources could lead to above average growth and profits. 2. guess a WACC for the acquisition. Invested great(p) ? $37,696,000 ? ? ? Debt $12,000,000 ? Equity $25,696,000 ? ? ? Current market price $44 ? Shares outstanding 584,000 ? ? ? Unlevered Beat of Comparables 0. 725 ? Debt/Capital of Comparables 32% ? Levered Beta 0. 86 ? peril free rate 4. 10% ? MRP 6. 0% ? ? ? Cost of equity 9. 28% ? ? ? Sources of capital Weights After-tax cost Debt 31. 83% 3. 64% Equity 68. 17% 9. 28% ? ? YTM 6. 070% Tax Rate 40% WACC 7. 5% 3. Discuss whether you cogitate the judge prepared by Vincent and Rudd is reasonable. Why? Be specific.We think the aim is not reasonable since they wait was too optimistic and subject of their sales growth. a) The growth rate estimate in the future they use is rough 6%. The genuine growth rate is just 2% that ordurenot be join ond as 2 times as large in a short time, although it might increase due to the sales increase after(prenominal) the merge and acquisition of the Monmouth and Robertson. b) NWC should be as a section of sales. c) Termin al Growth rate shouldnt be zero but around 2%. d) The estimations of SG&A cost and COGS are reasonable.The union and acquisition give result the percentage SG&A and COGS of sales respectively gradually decrease by increasing the manufacture energy and inventory turnover. Therefore, we decided to stir the growth rate from 6% to 3% in the pro-forma, we will baffle the cheer of the firm proposed out from the pro-forma is $50 million instead of $56 million. 4. Prepare a value estimate for Robertson equity using the DCF method and info from steps 2 and 3 above. ? Actual Forecasts ? 2002 2003 2004 2005 2006 2007 ? ? NOPAT 1. 8 2. 4 3. 1 3. 8 4. 2 4. 4Plus Depreciation 2. 1 2. 3 2. 5 2. 7 2. 9 2. 9 Less CAPEX -4 -3. 5 -3. 6 -3. 8 -2. 9 Less Change in NWC -1. 4 -1. 5 -1. 6 -1. 6 0. 0 Firm Free Cash Flow -0. 7 0. 6 1. 3 1. 7 4. 4 ? ? ? 81. 9 Firm de enclosureine (millions) 85. 95 Terminal g 2% Less Debt 12 ? Equity cheer 73. 95 ? Shares Outstandi ng 584000 ? Price per apportion 12. 66 ? ? ? ? ? 5. Estimate a value for Robertson equity based on the comparables approach. Actuant Corp. Briggs & Stratton Idex Corp. Lincoln galvanic Snap On Inc. Stanley Works Robertson Tool Co. Collection Period (days) 55 77 47 61 96 77 53 blood % Sales 12% 18% 13% 17% 18% 16% 33% Operating Margin % Sales 17% 13% 20% 15% 10% 15% 5% Return on Capital 21% 9% 10% 12% 11% 14% 4% Times Interest Earned 3. 8 3. 2 7. 1 11. 5 7. 8 9. 3 3. 5 Debt % Capital ? balance sheet determine 98% 52% 30% 27% 29% 40% 28% ? market values 29% 37% 20% 17% 19% 24% 37% Bond Rating BB- BB+ BBB - A+ A - Value of Firm ($ mil) $ 712 $ 1,443 $ 1,191 $ 1,145 $ 1,861 $ 3,014 $ 29 EBIAT ($ mil) 55 119 98 90 129 234 1. 80 EBIAT dual 12. 8 12. 1 12. 2 12. 7 14. 4 12. 9 16. 1 Share Price $ 42 $ 42 $ 29 $ 22 $ 26 $ 27 $ 30 Earnings Per Share 2. 80 3. 20 2. 00 1. 78 1. 80 2. 32 2. 32 Price/Earnings 15. 0 13. 1 14. 5 12 . 4 14. 4 11. 6 13. 5 Average p/e quadruplicate is 13. 5 Use the p/e multiple to multiply Robertsons earning per share=13. 5*2. 32=31. 32 without delay Robertson studyd 584,000 shares So the equity value is 18,290,880 6.What price will be indispensable to score the backup man of the Robertson family, Simmons, and the majority of shareholders? What are the interests, concerns, alternatives for each group? . Robertson Simmons majority of SHs Price $32. 82 $50 $30 Interest Distribution dust Interested in electrical equipment, tools, nonferrous metals, and rubber products To improve the EPS of Monmouth in the conterminous five years. Concerns A relatively poor sales and profit mathematical operation NDP Stock price fluctuates Poor society Performance Relative to the Industtry Alternatives NDP, Simmons, Monmouth 133000 shares NDP vs Monmouth . Does Monwouth have an advantage over NDP in the yellding contest? Do you think NDP will spring up its offer in response to Monmouth offer? The synergies created by a merger between Monmouth and Robertson are clearly greater than that of NDP. As a publisher and manufacturer of auto parts, the benefits would not be as many as that of Monmouth. NDP must consider how much it is willing to legislate or borrow in order to crap a bid greater than Monmouth. If Simmons receives his $50/share, he will be accepting of the merger, and support Monmouth.This will turn the favor to Monmouth, as an acquisition by NDP would for sure devalue the resources of Robertson instead of using synergies created by mixing markets and offering new, complimenting, product lines. In fact, as Robertson is undervalued in the market because of unsystematic latencies and inefficiencies, the $50/share price demanded by Simmons might be less than the ache-term gain inherent in the merger of Robertson and Monmouth. 8. What price smoke Monmouth pay without harming its long term trend in earnings per share ? Finance texts localize on net presen t value of cash flow to make investment decisions.Are companies therefore foolish if they make acquisitions based at least(prenominal) in part on earnings per share impact? First, we necessity to forecast Robertsons net income if it is acquired by Monmouth, assuming its interest expenses will be $0. 8 million for the next five years. Second, we will forecast Monmouths gist net income after acquisition of Robertson. Monmouth must raise funds to make this acquisition. The companionship anticipated making the acquisition by issuing stocks. Thus, we will calculate how many shares Monmouth should issue without harming its long term trend in earnings per share, and total shares outstanding after acquisition.We notice that currently stocks of Monmouth and Robertson closed at $24 and $44, respectively therefore, we can calculate the tack ratio as $44/$24=1. 83x. If Monmouth acquired the entire Robertson by an exchange of stocks at a price of $44 per share, the shares that Monmouth nee ds to issue is 1. 07 (1. 83*0. 584) million. As a result, Monmouths total shares outstanding after acquisition would increase to 5. 28 (4. 21+1. 07) million. Now we know the total net income and total shares outstanding after acquisition, we can then calculate the after-merge earnings per share of Monmouth.According to the table below, the row in green shows that the after-merge EPS is let down than the before-merge EPS during the first two years, but will become higher in the following three years. Therefore, if we paid $44 per share for Robertsons stocks, we can acquire the entire Robertsons stocks without harming Monmouths long term trend in earnings per share. Using the same techniques, we can estimate the price range that Monmouth can pay without harming its long term trend in earnings per share.We can use the Goal Seek function in Excel to estimate the highest exchange ratio. As you will see in the table below, the exchange ratio can increase up to 1. 98x without harming Monm ouths long term trend in earnings per share. Therefore, using the exchange ratio of 1. 98x, we can estimate the per share price paid for Robertsons stocks. The estimated price would be $47. 52 (1. 98*24) per share, higher than Robertsons current trading price of $44, therefore will attract the shareholders of Robertsons to sell but still ont harm Monmouths long term trend in earnings per share. However, EPS plays very little subroutine in deciding whether an acquisition is good or not, since a companys net income after acquisition and total shares outstanding can be affected by many factors. Acquisition will fill synergies to the acquiring company, such as cost savings and efficiency. Also, the acquiring company may not need to buy the entire target companys outstanding stocks to gain control. As a result, EPS could also change due to these factors. Thus, NPV is a better alternative to value an investment.