Bw/Ip International, Inc Case

Valuation of Corpo estimate Finance BUFN 750 BW/IP International, Inc 1? BW/IP is a good outlook for the leverage buyout. * Steady cash consort (around 30 million per year). * tight counsel team. * Positive NPV (about 61. 5 million) The NPV of BW/IP is 61. 5million(301-239. 5). Thus, we are kinda optimistic about this BW/IPs project. Calculating the NPV. method APV VL=VU+PV (ITS). We feces sign the interestingness paid schedule from the BW/IPs projected operating performance, which means there is a pre-determined interest paid to debt holders.Assumption Tax rate 38%. From 1991 to 1993, the assess rate stay to be constant, which is 38%. And we assume that the tax rate provide insure to be 38%. demo 1 shows the bear upon of calculating tax rate Growth rateWe assume the project lead stopping point for infinity, and grow in perpetuity after year 1992. And we usance the ordinary annually growth rate from 1990 to 1993 as our perpetuity growth rate, which is 2. 3%. tran splant in NWCWe subtract cash from NWC provided in the trip and we constrict the adjusted change in NWC.The counting is presented in exhibit 2. tax deduction rateTypically, the investment horizon of a common leverage buyout lay out from 5 to 10 years, so we use the ten years treasury yields, ending at 1987 as the peril free rate, which is 8. 79%. For the grocery store return, we use the S&P 500 indicant in 1980s, which is 12. 79%. Thus, we target easily get the risk premium. adjoin 3 shows the process of calculating discount rate. Tax nursesGiving the interest paid schedule, we can figure out the tax shield each year from 1988 to 1993 at the tax rate of 38%.Discount rate with a pre-determined debt and interest paid, we should use the personify of debt to get the present value of interest tax shield, because the risk of tax shield is moving together with the risk of the loan (debt), kinda of the total additions. We assume the corporate borrowing rate is the comparable with BBB semipermanent bond, which is the cost of debt, 10. 63%. Thus the present value of tax shield from 1988 to 1993 is 31. 91. We assume perpetual debt from the year 1994, and the same growth rate, which is 2. 3%. Exhibit 4 shows the processing of calculating tax shields.The FCF is presented in Exhibit 5. predisposition Analysis for BW/IP is presented in Exhibit 6 2? We favor the proposed skill of UCP. The primary sources of value in the transaction embarrass * Low capital or cash requirement UCP is a piffling firm, which would require additional borrowing by BW/IP of sole(prenominal) 13 million. * Synergy and efficient gains. UCPs yield line complemented BW/IPs extremely well because UCPs most dinky feature was its installed base in the petroleum industry and together they would guard the largest installed base in the petroleum segment. Improved management Takeover can improve management because interest and principal payments can force management to improve performanc e and operating efficiency. The proposed price is reasonable, because it is higher than the levered value of the project, which is 48. 17. regularity 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 second-rate 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 calculation 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 regard the troupesdecisions about long-horizon opportunities much(prenominal) as the UCP acquisition? What are the advantages and disadvantages of the 1987 buyout, viewed as afinancial computer programme? After the buyout, BW/IP became a privately owned society which was less dependent from Borg-Warner Corporation than before in decision ma king.For the opportunities that the managers favored, such as the UCP acquisition, the caller had more chance to carry on the deal. However, for the case in which larger amount of financing is necessitate, the company may not be competitive enough without Borg-Warners financial support. The buyout could generateda better and a more efficient management, by changing the corporate structure (including modifying and renew executive and management staff, unnecessary company sectors, and excessive expenditures), BW/IP can revitalize itself and earn 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 faced the chance of bankruptcy. Besides, the leveraged buyout is withal considered to be a uncollectible project, which may be easily affected by economics environment. The chance of success tends to be larger nether steadily growing ec onomy, while smaller in recession periods. 4. As one of BW/IPs bankers, would you approve the companys 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 confidence 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 big 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 UCPs product line complemented BW/IPs extremely 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&Ds principals we re 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 Change 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 94. 25 102. 32 109. 29 116. 81 Change 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 signature Market return 12. 79% S&P 500 index in 1980s Risk premium 4. 00% Exhibit 4 engage 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 emailprotected% 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 flow 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 Value 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 7The 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 Depreciation 0. 48 0. 6 0. 99 0. 90 0. 84 0. 84 Change in N WC Change in AR 1. 13 -0. 15 -0. 22 -0. 20 -0. 13 -0. 14 Change in inventory -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 8The 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 emailprotected% 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%