For the net change in working capital we included all of the current assets and liabilities. Cash is included because we saw a direct relationship between the increases in sales each year with the increase in cash, assuming that cash has been used for operational purposes. This increase over years is exactly 3. 2%. On the other hand, we identified an odd behavior in the increase of CAPE. According to accounting principles and using the correct formula of Fixed Assets to calculate the purchases, we identified a CAPE of ?3, 125 per year.
The ormolu used to calculate these values is the following: Ending PEP- Beginning PEP+ Depreciation = CAPE However, we took into consideration no net increase (difference between the gross depreciation, which is “O”). This is mainly because as stated in the case, SUPERMAN is not able to invest more cash as the market is saturated. For the calculation of the “g” rate we used the formula of Reinvestment rate x ROI. This yields a rate of -0. 18%. Considering that the average growth rate of the Spanish economy is around 2. 2% over the past 10 years, we believe that
SUPERMAN is performing under a very competitive environment, this is why we assume the growth rate at -0. 18%. The cash flows calculated for the three scenarios are the following, 2007 is our year Using these cash flows, we will attempt to find the firms value and equity value using different capital structures. A. If capital remains at current levels Given the inputs we arrived to a WAC of 1 1 . 38% to use for the discounted cash flows. We used the current capital structure which is 14% debt, 86% equity. Our results considering a WAC of 1 1. 8% and using the cash flow table above are the following: We discount the cash flows with the same WAC throughout the following years. The level of debt we should use to find the equity value is 2,404 euros corresponding to the debt levels one year before projections (2007). The result of our valuation is the following: b. If capital structure converges immediately to target For this case, we had to do an extra calculation. Enlivening the beta with the current capital structure and lever it to the target which is 30% debt and 70% equity. The results are as follow: With the new capital structure mentioned, the WAC used will be 1 1. %. Our results considering this WAC and using the initial cash flow table above are the fool lowing: years (11. 84%). The level Of debt we should use to find the equity value is ?2,404 corresponding to the debt levels one year before projections (2007). The result of our valuation is the following: c. If capital structure converges progressively to target Given the inputs, our capital structure will vary the following way: As the capital structure changes towards the target (30% debt) during the following years until 201 3, the WAC; s will have different values as shown above.
Incorporating the new capital structures and the Whack’s for each year of projections, our results are the following: We discount the cash flows with its corresponding WAC rate for each year. The level of debt as mentioned for the other scenarios is the same (?2,204 form year 2007). Our results are the following: By using a constant WAC assuming that the capital structure will not change over time, yields the highest result, which is a firm value of ?47,894. However, this is not the approach that should be taken in order to take the correct decision.
The most appropriate way of measuring the firms value is using a rolling WAC, because capital structures may constantly change considering funding needs. Question 2 – Find BRASS’S stand-alone value using a relative valuation approach. In order to calculate BRASS’S relative value, we used the information on appendix IV: In order to make a correct analysis of the value, we must first take the proportion of every acquisition to 100%. When doing this, we arrive at the following results: Since we have Enterprise values paid (@100%) and the annual revenues of ACH company, we have the multiple (EVE/Revenues) for each company.
The average of this multiple is 35. 2%. In order to find BRASS’S relative value, we multiply the average (multiple) by revenues in 2007, which are ?183,099. Valuating a firm using relative data and multiple approaches has negative aspects. In this case, if we compare the sales of the different companies in the industries we can observe that there are outliers such as company HEY and company Z, with lower level of revenues, however we considered taking them into account for the analysis. The approach used to value a firm should e using the discount cash flow as stated in question 1 for SUPERMAN.