'Bw/Ip International, Inc Case\r'

'Valuation of Corpo post pay BUFN 750 BW/IP International, Inc 1? BW/IP is a good nominee for the leverage buy step up. * Steady gold carry (around 30 gazillion per socio-economic class). * Strong attention aggroup. * Positive NPV ( astir(predicate) 61. 5 million) The NPV of BW/IP is 61. 5million(301-239. 5). hence, we are quite optimistic about this BW/IP’s project. reckon the NPV. method acting: APV: VL=VU+PV (ITS). We can entrance the engagement stipendiary schedule from the BW/IP’s projected in operation(p) performance, which kernel there is a pre-determined busy salaried to debt holders.Assumption: evaluate direct: 38%. From 1991 to 1993, the task step remains to be constant, which is 38%. And we comport that the evaluate lay go out continue to be 38%. award 1 shows the process of conniving assess point: addition rate:We conduct the project will last for infinity, and ripen in perpetuity after stratum 1992. And we consumption the a verage annually product rate from 1990 to 1993 as our perpetuity process rate, which is 2. 3%. alteration in NWC:We reckon cash from NWC provided in the case and we get the adjusted change in NWC.The reckoning is presented in portray 2. rebate rate:Typically, the investment horizon of a roughhewn leverage buyout range from 5 to 10 long time, so we use the ten years treasury yields, ending at 1987 as the gamble free rate, which is 8. 79%. For the securities industry transcend, we use the S&P 500 index in 1980s, which is 12. 79%. Thus, we can comfortably get the take medical prognosiss allowance. debunk 3 shows the process of calculating discount rate. Tax screens:Giving the interest paid schedule, we can figure out the tax income shield each year from 1988 to 1993 at the tax rate of 38%. synthesis rate: with a pre-determined debt and interest paid, we should use the cost of debt to get the present prize of interest tax shield, because the risk of tax shield is moving together with the risk of the loan (debt), instead of the total additions. We assume the embodied borrowing rate is the comparable(p) with BBB long-term bond, which is the cost of debt, 10. 63%. Thus the present honour of tax shield from 1988 to 1993 is 31. 91. We assume perpetual debt from the year 1994, and the same product rate, which is 2. 3%. manifest 4 shows the processing of calculating tax shields.The FCF is presented in viewing 5. Sensitivity Analysis for BW/IP is presented in viewing 6 2? We favor the proposed acquisition of UCP. The firsthand sources of value in the transaction entangle: * Low crownwork or cash wantment UCP is a small firm, which would require additional borrowing by BW/IP of only 13 million. * synergism and efficient gains. UCP’s product downslope complemented BW/IP’s highly well because UCP’s most magnetic feature was its installed free-base in the crude industry and together they would have the largest install ed base in the petroleum segment. Improved attention Takeover can improve attention because interest and principal payments can propel forethought to improve performance and operating efficiency. The proposed price is reasonable, because it is higher than the levered value of the project, which is 48. 17. Method: APV: VL=VU+PV (ITS). Assumption: Tax rate: Tax rate=38%, which is the same as the tax rate for BWIP. Growth rate: We use the average annually growth rate from 1991 to 1993 as ourgrowth rate,which is 6%. Discount rate: We use the ten years treasury yields, ending at 1988 as the risk free rate, which is 9. 4%. Exhibit 7 shows the figuring of Vu Exhibit 8 shows the calculation of PV(ITS) Sensitivity Analysis for UCP/IP is presented in Exhibit 6 3. How do the various features of the BW/IP buyout necessitate the association’sdecisions about long-horizon opportunities such as the UCP acquisition? What are the advantages and disadvantages of the 1987 buyout, viewed a s a pecuniary plan? After the buyout, BW/IP became a privately owned confederacy which was little dependent from Borg-Warner Corporation than before in decision making.For the opportunities that the managers favored, such as the UCP acquisition, the connection had much chance to carry on the deal. However, for the case in which larger meter of financing is required, the company may non be competitive enough without Borg-Warner’s financial support. The buyout could throwda better and a more efficient management, by changing the corporate structure (including modifying and replacing executive and management staff, unnecessary company arenas, and excessive expenditures), BW/IP can revitalize itself and pee-pee substantial returns.However, since the 1987 buyout is highly leveraged, the new company has a high debt-to-equity ratio, which means the company needs to achieve required return to pay the cost of debt or approach the chance of bankruptcy. Besides, the leveraged buyout is also considered to be a tempestuous project, which may be easily affected by economics environment. The chance of winner tends to be larger at a lower place steadily growing economy, while littler in recession periods. 4. As nonpareil of BW/IP’s bankers, would you revere the company’s request for a waiver of covenants and financing of the UCP acquisition?Yes. A banker will not approve to finance a project unless he has dominance in the profitability of the project and in that he can get his money back. The projected NPV of the UPC deal is 48. 17 million dollars, which is far bigger than the offer 18. 5 million dollars. To analyze this qualitatively, the expected success of the UCP acquisition comes from several aspects. Undeniably, the economic and industrial forecast is against financing a risky project . However, the deal will generate positive synergies since UCP’s product occupancy complemented BW/IP’s highly well.BW/IP will raise its competence in both original equipment and aftermarket sector domestically as well as internationally after acquiring UPC. Besides, as mentioned in the case, the good credibility of Mr. Valli and his team and that C&D’s principals were experienced and respected in the financial community will affect bankers’ attitude. Exhibit 1: Tax rate | 1987| 1988| 1989| 1990| 1991| 1992| 1993| EBT| -9. 56| -0. 001| 8. 91| 12. 95| 17. 31| 19. 49| 23. 57| Income tax| 2. 8| 0| 0| 3. 61| 6. 58| 7. 41| 8. 96| Tax rate| -29%| 0%| 0%| 28%| 38%| 38%| 38%| Exhibit 2: switch over in NWC AR| 58. 68| 53. 1| 51. 69| 55. 08| 59. 11| 63. 6| 67. 91| 72. 54| INV| 58. 5| 58. 39| 60. 72| 64. 66| 69. 57| 75. 46| 80. 29| 85. 53| Other current asset| 3. 91| 3. 49| 4. 42| 4. 7| 4. 99| 5. 31| 5. 64| 5. 99| AP| 15. 78| 18. 12| 19. 73| 20. 94| 22. 32| 23. 78| 25. 19| 26. 69| Other current liabilities| 14. 92| 17. 29| 15. 19| 16. 12| 17. 1| 18. 23| 19. 36| 20. 56| NWC| 90. 39| 79. 57| 81. 91| 87. 38| 9 4. 25| 102. 32| 109. 29| 116. 81| miscellany in NWC| | -10. 82| 2. 34| 5. 47| 6. 87| 8. 07| 6. 97| 7. 52| Exhibit 3: Cost of capital Cost of capital| 17. 5%| CAPM| Rf| 8. 79%| Exhibit 7 | ?a| 1| jumper cable| Market return| 12. 79%| S&P 500 index in 1980s| Risk premium| 4. 00%| |Exhibit 4: amuse tax shield | 1988| 1989| 1990| 1991| 1992| 1993| Total interest paid| 0. 63| 1. 75| 1. 66| 1. 51| 1. 4| 1. 22| ITS: tax [email&#clx;protected]%| 0. 24| 0. 67| 0. 63| 0. 57| 0. 53| 0. 46| Cost of debt 10. 63%| | PV (ITS) 1988-1993| 31. 91| PV (Terminal value)| 37. 1| Total PV (ITS)| 69. 00| Exhibit 5: Free cash lam | 1986| 1987| 1988| 1989| 1990| 1991| 1992| 1993| FCF| | 39. 37| 26. 8| 24. 62| 24. 11| 24. 57| 24. 72| 25. 8| Growth rate| 2. 3%| Terminal judge| 270| VU| 232. 89| PV (ITS)| 69| VL| 301. 89| Exhibit 6: Sensitivity analysis for BW/IP * Buyout| | * NPV| * % change of NPV| * Growth rate| * 0. 00%| * 32. | * -47. 91%| | * 2. 30%| * 62. 39| * 0. 00%| | * 4. 60%| * 109. 5| * 75 . 51%| * Discount rate| * 10. 79%| * 81. 5| * 32. 52%| | * 12. 79%| * 61. 5| * 0. 00%| | * 14. 79%| * 44. 5| * -27. 64%| * Cost of debt| * 9. 63%| * 64. 5| * 4. 88%| | * 10. 63%| * 61. 5| * 0. 00%| | * 11. 63%| * 59. 5| * -3. 25%| Exhibit 7:The calculation of Vu | 1988| 1989| 1990| 1991| 1992| 1993| EBIT| -1. 15| 2. 59| 3. 29| 3. 96| 4. 34| 4. 74| Income tax @| -0. 44| 0. 98| 1. 25| 1. 50| 1. 65| 1. 80| NI| -0. 71| 1. 61| 2. 04| 2. 46| 2. 69| 2. 94| FCF| | | | | | | derogation| 0. 48| 0. 6| 0. 99| 0. 90| 0. 84| 0. 84| Change in NWC| | | | | | | Change in AR| 1. 13| -0. 15| -0. 22| -0. 20| -0. 13| -0. 14| Change in stemma| -0. 36| 0. 68| -0. 21| -0. 18| -0. 12| -0. 13| Change in other asset| 1. 73| 0. 00| 0. 00| 0. 00| 0. 00| 0. 00| Change in current liability| 0. 27| 0. 18| -0. 01| -0. 35| -0. 04| -0. 04| Change in NWC| 2. 23| 0. 35| -0. 42| -0. 03| -0. 21| -0. 23| Capital expenditure| 0. 18| 1. 20| 0. 40| 0. 40| 0. 40| 0. 40| FCF| -2. 64| 1. 02| 3. 05| 2. 99| 3. 34| 3. 61| Growth rate| | | | -2%| 12%| 8%| Average growth rate| 6%| | | | | | Terminal value| | | | | 53. 15| | FCF| -2. 64| 1. 02| 3. 05| 2. 99| 56. 9| | VU| 40. 28| | | | | | Exhibit 8:The calculation of PV(ITS) | 1988| 1989| 1990| 1991| 1992| 1993| Interest | 0. 63| 1. 75| 1. 66| 1. 51| 1. 40| 1. 22| ITS: tax [email&# one hundred sixty;protected]%| 0. 24| 0. 67| 0. 63| 0. 57| 0. 53| 0. 46| Terminal value| 2. 18| | | | 10. 01| | PV (ITS)| 7. 97| | | | | | Exhibit 9: Sensitivity analysis for UCP/IP UCP| | NPV| % Change of NPV| Growth rate:| 0. 00%| 14. 35| -51. 76%| | 6. 00%| 29. 75| 0. 00%| | 12. 00%| 278. 5| 836. 13%| Discount rate:| 10. 79%| 46. 5| 57. 63%| | 12. 79%| 29. 5| 0. 00%| | 14. 79%| 20. 21| -31. 49%| cost of debt:| 9. 63%| 30. 5| 3. 39%| | 10. 63%| 29. 5| 0. 00%| | 11. 63%| 27. 5| -6. 78%|\r\n'