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Group 6

Abhishek Sinha
Abhishek Sharma
Amit Jain
Sandeep Suman
Sumit Aggarwal

39
41
44
67
73

WACC Definition
WACC = (D/V)*Rd*(1-T) + (E/V)*Re
where V = D + E, Rd is the pretax cost of debt, T is the tax rate and Re is the cost of equity
COST OF DEBT
Estimate Rd
Estimate tax rate
After Tax Cost of Debt

6.60%
43.40%
3.74%

COST OF EQUITY = Rf + Beta*MRP


Risk free rate as of April 1998
Market risk premium

(Exhibit 8)

6%
7.20%

Equity Beta
What is the equity beta for a private firm?
We use comparable firms. But, first we need to decompose Kohler into its various groups.
Exhibit 4

Kohler Co. Income Statements 1997 by Group (in $ thousands, as of December 31)
Kitchen & Bath
Group

Power
Systems
Group

Interiors
Group

Hospitality &
R. Estate
Group

1,485,831
1,045,038

540,260
461,140

145,414
92,564

50,789
43,041

Gross Profit

440,793

79,120

52,850

7,748

Selling & Administrative Exp.


Amortization of Intangibles

284,097
-

44,600
-

45,580
-

4,872
-

Operating Income after Depr.

156,696

34,520

7,270

2,876

Non-operating Income (Expense)


Interest Income
Interest Expense

-6,400
1,477
10,181

-269
180
2,428

514
142
1,633

0
12
1,040

Pretax Income

141,591

32,004

6,292

1,848

Income Tax Expense

54,179

Net Sales
Cost of Sales

Net Income

87,411

11,605
20,398

2,291
4,001

727
1,121

Percentage of Sum of 4 Groups


Net Sales
Gross Profit
Net Income

67%
76%
77%

24%
14%
18%

7%
9%
4%

2%
1%
1%

Comparables (Exhibit 7b)


American American
Standard Woodmark
Stock Market Data as of 4/30/1998
Ticker
Shares Outstanding (in thousands)
Stock Price ($)
Market Value of Equity
Market Value of Equity,
Average of Latest 36 Mths.
Equity Beta Over Latest 36 Months
Financial Data as of 3/31/1998
Latest Twelve Months
Total Debt
Sales
EBITDA
Cash Flow
EBIAT

Masco

Briggs &
Stratton

ASD
71,929
48.69
3,502.0

AMWD
7,811
30.25
236.3

MAS
169,634
58
9,838.8

BGG
24,514
45.25
1,109.3

2,762.9
0.82

82.0
0.76

5,937.3
1.28

1,210.0
0.66

2,404.0
6,139.5
699.3
462.5
292.6

13.4
327.0
37.6
27.4
17.1

1,187.9
3,945.0
838.4
553.4
437.3

259.6
1,327.2
178.3
127.2
80.4

2,216.6
5,767.8
667
420.9
263.5

12.3
262.7
30.7
22.1
13.7

1,341.3
3,414.0
721.9
473.6
367.4

155.4
1,282.2
187
132.1
87.1

5,906.0
0.59
0.49

249.7
0.95
0.72

11,026.7
0.89
1.14

1,368.9
0.81
0.53

Average of Latest Three Years


Total Debt
Sales
EBITDA
Cash Flow
EBIAT

V=D+E

E/V
Asset Beta = Equity Beta*(E/V)

These are unlevered betas - assuming a common debt beta equal to 0


Next, relever to Kohler's capital structure
Kohler Equity (Exhibit 3a)
Kohler Debt

538992
513056
Asset Beta

E/V

D/V

Equity Beta

Avg of Kitchen & Bath Comparables


Average of Power Systems Comparables

0.78
0.78

0.81
0.77

0.19
0.23

0.97
1.02

Weighted Average of 80% Kitchen


and 20% Power Systems

0.78

0.80

0.20

0.98

WACC

D/V = 1-E/V
Use Asset Beta = Equity Beta*(E/V)

Elim. & Corp. Var.

Kohler Co. Consol. Sum of 4 Groups Sum of 2 Major Groups

-8,891
(4,398)

2,213,403 $
1,637,385 $

2,222,294
1,641,783
580,511

$
$
$

2,026,091
1,506,178
519,913

-4,492

576,019 $

942
21,618

380,091 $
21,618

379,149

328,697

-27,052

174,310 $

201,362

191,216

409
426
(1,251)

-5,746 $
2,237 $
14,031 $

-24,965

156,770 $

(6,155)
1,811
15,282
181,735

$
$
$
$

(6,669)
1,657
12,609
173,595

68,802
112,931

$
$

65,784
107,809

(6)
-24,957

68,796

87,974 $

Percentage of Sum of 2 Major Groups


Kitchen and Bath Power Systems
73%
27%
85%
15%
81%
19%

Cummins Engine

Detroit Diesel

CUM
42,036
54.38
2,285.7

DDC
24,701
23
568.1

2,053.6
1.09

502.5
1.3

1,250.0
5,821.0
487
390.2
224.2

107.4
2,233.0
105.5
82.8
41

686.7
5,431.0
448.3
377.5
221

127.3
2,090.7
100.2
78.2
40.5

3,535.7
0.65
0.70

675.5
0.84
1.09 <----FILL THIS OUT

Rf
MRP
A-T Rd

Cost of Equity

6.00%
7.20%
3.74%

A-T Cost of Debt WACC

12.95%
13.31%

3.74% 11.2%
3.74% 11.1%

13.02%

3.74% 11.2%

Calculate Using CAPM

Use Asset Beta = Equity Beta*(E/V)

Hint: Use Exhibit 7b


Each multiple is the ratio of the total enterprise value (MVE+BV of Debt) to the accounting/valuation item of interest

American Standard
American Woodmark
Masco
Briggs & Stratton
Cummins Engine
Detroit Diesel

Market
Total
Value of Equity Debt
3502
236.3
9,838.8
1,109.3
2,285.7
568.1

2404
13.4
1,187.9
259.6
1,250.0
107.4

Average of Kitchen and Bath Comparable Companies


Median of Kitchen and Bath Comparable Companies
Average of Power Systems Comparable Companies
Median of Power Systems Comparable Companies
Average of All Six Comparable Companies
Median of All Six Comparable Companies
Weighted Average 80% Kitchen & Bath, 20% Power Systems

Kohler Co. Total Enterprise Values Implied by Multiples for Comparable Companies (in $ millions)

Sales
Multiple
Kohler Co. Accounting Items for
12 Months ending 4/30/98

EBITDA
Multiple
2,270

194.04

Average of Kitchen and Bath Comparable Companies


Median of Kitchen and Bath Comparable Companies

3419.16
2179.20

1826.76
1639.64

Average of Power Systems Comparable Companies


Median of Power Systems Comparable Companies

1468.94
1378.81

1380.30
1408.76

Average of All Six Comparable Companies


Median of All Six Comparable Companies

2444.05
1956.30

1603.53
1449.25

Weighted Average 80% Kitchen & Bath, 20% Power Systems

3029.12

1737.47

Kohler Co. Values Implied by Multiples --

aluation item of interest


Total
Sales
Enterprise Value Multiple
5906
249.7
11,026.7
1,368.9
3,535.7
675.5

EBITDA
Multiple
0.96

Cash Flow
EBIAT
Multiple
Multiple
12.77
20.18
9.11
14.60
19.93
25.22
10.76
17.03
9.06
15.77
8.16
16.48

2.80
1.03
0.61
0.30

8.45
6.64
13.15
7.68
7.26
6.40

1.51
0.96

9.41
8.45

13.94
12.77

20.00
20.18

0.65
0.61

7.11
7.26

9.33
9.06

16.42
16.48

1.08
0.86

8.26
7.47

11.63
9.94

18.21
16.75

1.33

8.95

13.01

19.28

0.76

n $ millions)

Cash Flow
Multiple

EBIAT
Multiple

Avearge of
4 Multiples

Median of
4 Multiples

119.13

98.34

1660.22
1521.29

1966.73
1984.50

2218.22
1831.16

1896.74
1812.07

1111.14
1079.47

1615.14
1620.21

1393.88
1371.81

1424.62
1393.78

1385.68
1183.85

1790.93
1647.28

1806.05
1559.17

1697.23
1548.27

1550.40

1896.41

2053.35

1816.94

Valuation date: 4/30/98


Discounted Cash Flow Valuation
WACC
Perpetuity growth rate

Operating Income after Depreciation


Tax Rate
Taxes
EBIAT

Depreciation and Amortization


Net Capital Expenditures
Change in Net Working Capital
Free Cash Flow

11%
4%
1998
1999
2000
2001
$ 102,688
126,032
171,619
187,978
44.3%
43.42%
43.42%
43.42%
$
45,451
54,724
74,518
81,621
$
57,237 $
71,308 $
97,101 $ 106,357

$
$
$

56,113
(87,691)
(1,435)
24,224

87,661
(97,205)
(5,762)
56,002

91,786
(96,971)
(27,705)
64,211

94,593
(96,811)
(17,702)
86,437

Discounting Period (mid-period)


Present Value
Present Value of Cash Flows

1.17
$49,565

2.17
$51,199

3.17
$62,091

0.17
$23,798
239,479

Terminal Value
Present Value of Terminal Value

874,192

Total Enterprise Value

$ 1,113,671

You can change the valuation by having a monority discount (start approx 20%) Als

2002

2002 Normalized
201,604
201,604
43.42%
43.42%
87,537
87,537
114,067 $
114,067

97,355
(106,647)
(23,145)
81,630
4.17
$52,827

-23145
90,922
4.17
$58,840

$1,350,840

onority discount (start approx 20%) Also tack on discount for market instability (start approx 40%)

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