1) Particulars Value

30 Year treasury bond rate 8.58%

Market Risk premium 5.50%
Equity Beta 0.89
Market Value of Equity 70.2
Market Value of Debt 10.6
Enterprice value 80.8
Cost of equity 13.48%
Interest rate 15%
Tax rate 34%
After tax cost of debt 10%
WACC 13.01%

2) 2 scenarios are presented in the case by the task force

Scenario 1

Acquisition of Pinkerton. This would involve elimination of overhead expenses and improvements in
NWC. Marketing of both firms could be made common to optimize costs

Scenario 2

Maintaining the status quo as the challenges to manage Pinkerton may be too much for the
management

3)
 s and improvements in
mize costs

e too much for the

Particulars Scneario 1
1988 1989
No Difference 90% of '87 80% of '87
1) Sales Revenue
2) Opex 6% 5.90%
3) Net PPE
Difference
1) GPM 8.50% 9%
2) CPPs EBIT
3) NWC 8.60% 7.40%

Q1) Comparable Beta = Firm Beta =

Cost of equity = 8.58%+0.89*5.5%
From the income statement of Pinkerton, no value of debt is provided which implies debt is 0
Cost of debt = 9.76%
Option A (75M Debt @ 11.5%)
Post-tax CoD 7.59%
WACC = 13.48%*(E/V)+7.59%*(D/V)
OE of Pinkerton = 87-30.6
WACC = 10.66%
In case of full sale WACC = 9.06%

Option B (100M @ 13.5%)

Post-tax CoD 8.91%
WACC = 10.56%
1 2
Q3) Particulars 1988 1989
Sales 367.47 326.64
Gross Profit 31.23 29.40
(Opex) 22.05 19.27
EBIT 9.19 10.13
EBIAT 6.06 6.68
Net PPE (17.6) 14.70 13.07
(Delta Capex) 2.9 1.63
WC-> 37.7 31.60 24.17
(Delta NWC) 6.10 7.43
FCFF 15.06 15.74
PVCF 13.61 12.86
 EV 133.47

Particulars 1988 1989

Increase in EBIT 0 1.2
Incrase in EBIAT = FCFF 0 0.792
Incremental PVCF 0 0.6467610387
Incremenral EV 25.5860552952

Total EV under option 1 159.06

Q4) Use same approach as Q4

Q5 a) Opex/SR 6.61%
Particulars 1988 1989
Sales Revenue 367.47 326.64
Opex (under status quo) 24.25 21.56
(-) Proposed Opex 22.05 19.27
Saving in opex 2.20 2.29
=> Increase in EBIT 2.20 2.29
After-tax increase in EBIT 1.46 1.51
Incremental PVCF 1.3150019881 1.2323384831
Value of reduced overhead 24.9532912859

Q5 b) Particulars 1988 1989

Projected WC 31.60 24.17
Status Quo WC 33.92 30.15
Incremental CF 2.32 5.98
Incremental PVCF
Value of incremental improvements

1984 1985
Revenue Growth rate 3.8% 1.5%
Present GP Margin 6.51%

Q6) Post Acquisition B

Particulars Pre-acquisition BS 75M -> Debt, 25M -> Eq
Cash 1.2 2.3

CL
LTD 2 77
 OE 18 43

Use goodwill as the balancing figure

Q7) Particulars y1 y2
FCFF of Pinkerton 15.06 15.74
Incremental CF for CPP 0 1.2
CPPs CF 2 2.8
Total Cash available 17.06 19.74
Fin Plan A Principal repayment 0 0
Interest payment (@11.5%, 5.69 5.69
Excess CF 11.37 14.05
Cumulative buffer 11.37 25.42

14.05
Scneario 1 Scenario 2
1990 1991
70% of '87 75%

5.80%

9.50% 10.25% 8.50% 8.75% 9% 9.50%

No improvement
6.2%..... 9.5%.....

0.89
= 13.48%
ded which implies debt is 0
//From exhibit 2. Using CPPs interest expense data Wrong
//Pretax

.59%*(D/V)
= 56.4
//Partial Sale

3 4 5
1990 1991 1992
285.81 300.10 315.11
27.15 30.76 32.30 Net PPE =
16.58 17.41 18.28
10.57 13.35 14.02
6.98 8.81 9.25
11.43 12.00 12.60 //Rough to calculate delta capex
1.66 -0.57 -0.6
17.72 18.61 19.54
6.45 -0.89 -0.93
15.09 7.36 150.94
11.14 4.91 90.96
 1990 1991 1992
1.5 2 3
0.99 1.32 38.71144876 TV = 36.73144876
0.730572292 0.880260609 23.32846136

1990 1991 1992

285.81 300.10 315.11
18.86 19.81 20.80
16.58 17.41 18.28
2.29 2.40 2.52
2.29 2.40 2.52 TV = 31.91546763
1.51 1.58 33.58
1.1136259562 1.056666595 20.23565826

1990 1991 1992 1987 WC = 37.7 * 100 /408.3

17.72 18.61 19.54 =
26.38 27.70 29.08
8.66 9.09 186.34 //NWC coming after tax, hence don't need to multi
TV =

Reduce by 1.5% for smooth decrease

1986 1987 1988 1989 1990 1991
17.7% 11.0% 9.5% 8.0% 6.5% 5.0%

Post Acquisition B
100M -> Debt
2.3

102
 18

y3 y4 y5
15.09 7.36 7.72
1.5 2 3 //From case text
3.1 4.3 4.4 //From exhibit 3
19.69 13.66 15.12
0 0 0
5.69 5.69 5.69
14.00 7.97 9.43
39.42 47.38 56.81
late delta capex TV Calculation
Scenario A
WACC = 10.66%
TV = 143.22
* 100 /408.3
9.23%

fter tax, hence don't need to multiply by (1-t)

176.7932862