the discounted cash flow analysis section of Exhibit 12 . As a member of Interco’s board, are you persuaded by this analysis? Critically assess it. 5. Use the cash flow forecasts over the next ten years for Interco as posted on the blackboard. Assume that the terminal value of Interco at the end of year ten is estimated to be 14 times its year ten cash flow of $339 million. a. What is the fair price per share of Interco stock assuming a discount rate of 10% is used based on these forecasts? What if the discount rate is 14%? b. What fraction of Interco’s estimated total firm value represents the terminal value of Interco, and what fraction of the total firm value represents the present value of the expected cash flows over the next ten years. Do this calculation assuming a discount rate of 10% and then assuming a discount rate of 14%. c. Comment on the choice of 10% as the rate to discount Interco’s future cash flows. Too low, too high, just right? Why? Is 14% a more suitable discount rate? Why? d. What long-term growth rate for cash flow is implicitly assumed when the terminal value at the end of year ten is set to equal 14 times year ten cash flow and a discount rate of 10% is used? How about when a discount rate of 14% is used? Is either of these implied growth rates reasonable for Interco? To calculate the stock price, you obviously need to know two things – how many shares of stock Interco there are outstanding and how much of the asset value of Interco is financed by debt (instead of equity). Value of equity = value of assets – debt. Assume that Interco has 37.5 million fully diluted shares outstanding (as Wasserstein, Perella, & Co. did in Exhibit 13). Also, Exhibit 9 (summary of takeover analysis) mentions that the net debt that Interco has is $318.5 million. 6. How would you advise the Interco board on the $70 per share offer?
The primary objective of this case is to provide you with an opportunity to appreciate the importance of assumptions and internal consistency in valuation analysis, compare and contrast various valuation techniques, and become a critical consumer and competent practitioner of valuation analysis. The following is a list of questions that may help you analyze the case. 1. Assess Interco’s recent financial performance. Why is the company a target of a hostile takeover attempt? 2. What are Interco’s goals in August 1988 and how does it plan to achieve them? What actions had Interco already taken prior to August 1988? 3. As a member of Interco’s board, are you persuaded by the premiums paid analysis ( Exhibit 10 ) and the comparable transactions analysis ( Exhibit 11 )? Critically assess them. 4. Wasserstein, Perella & Co. established a valuation range of $68-$80 per common share for Interco. Show that this valuation range can follow from the assumptions described in the discounted cash flow analysis section of