Assess DPC's fit within DuPont. What are its prospects going forward as a division within DuPont...
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Assess DPC's fit within DuPont. What are its prospects going forward as a division within DuPont versus its potential value to an outside party? 2. How attractive is DPC as an acquisition from a strategic buyer's or PE firm's perspective? What are the potential risks to such a deal? What are some of the important features of APV, and why is it a useful approach for valuing an LBO? 3. Working from case Exhibit 9. relative to the stand-alone value, estimate the dollar increase in DPC's value if a PE fund can obtain: a. 5% revenue growth per annum (versus 4% growth) in each of the next five years and improve the operating margin to 12% (versus 10%). b. Assume part a and that the division can be sold at 7.5x EBITDA in five years. c. Assume part a and part b and that debt financing equal to 6.0x forward EBITDA can be obtained. Assume that all cash available to pay debt each year (i.e., residual cash flow) is used to pay down the LBO debt and that, after five years, the firm will revert to an all-equity firm. d. What are some of the advantages and risks of using leverage to finance the investment? 4. If a PE sponsor has a target return of 20% on its funds (equity contribution), what is the maximum enterprise value it can offer for DPC under parts b and c above? What minimum bid should Ellen Kullman set if she chooses to sell DPC? Exhibit 9 DuPont Corporation: Sale of Performance Coatings Stand-Alone Valuation (dollars in millions) PPG Industries Metric Actual 2011 Sales Growth (%) 10.9% EBIT Margin (Pretax) EV/EBITDA 2012 (x) 11.2% 7.3 2012E Projected 2013E 4.1% 4.3% 11.0% 12.0% DuPont Performance Coatings Metric Projected 2011A Closing 2012E 2013E 2014E 2015E 2016E Sales Growth (%) 12.5% 4.0% 4.0% 4.0% 4.0% 4.0% Depreciation and Amortization $104 $115 $118 $122 $125 $130 EBIT Margin (Pretax) 6.3% 10.0% 10.0% 10.0% 10.0% 10.0% Tax Rate 25% 25% 25% 25% 25% 25% Capital Expenditures $80 $115 $122 $132 $144 $150 Net Working Capital (%) 15.0% 15.0% 15.0% 15.0% 15.0% Terminal EBITDA Multiple (*) 2 7.0 Debt/EBITDA 2012 (*) N/A Debt Blended Interest Rate on Debt 6.75% Unlevered Cost of Equity³ 11.2% Exhibit 9 (continued) Stand-Alone Valuation (continued) APV Analysis 2011A Closing 2012E 2013E 2014E 2015E 2016E Net Sales $4,281 $4,452 $4,630 $4,816 $5,008 $5,208 EBITDA $372 $560 $581 $604 $626 $651 Depreciation and Amortization $104 $115 $118 $122 $125 $130 Pretax Operating Income (EBIT) $268 $445 $463 $482 $501 $521 Interest Expense $0 $0 $0 Eamings before Taxes $445 $463 $482 $501 $521 Taxes ($111) ($116) ($120) ($125) ($130) Net Income $334 $347 $361 $376 $391 Increase in Net Working Capital ($26) ($27) ($28) ($29) ($30) Capital Expenditures ($115) ($122) ($132) ($144) ($150) Residual (Levered) Cash Flow $308 $317 $323 $327 $341 Unlevered Free Cash Flow (FCF) $308 $317 $323 $327 $341 Terminal Value $4,738 Unlevered FCF, including TV $308 $317 $323 $327 $5,079 Enterprise Value (EV) $3,970 Interest Tax Shield PV Tax Shield EV with Tax Shield $3,970 Data sources: Historical information for DPC is from DuPont company Databooks. Projections are case writer estimates. PPG's enterprise value is based on prices at the end of January 2012. PPG's projections are based on Buckingham Research Group analyst report, PPG Industries: "Other" Industrial Coatings Review, May 21, 2012. Notes to stand-alone model DPC's estimated average tax rate of 25% is lower than the US. marginal corporate tax rate as a result of international operations taxed at lower rates. * Assumed forward exit multiple for Terminal Value is based on projected EBITDA growth in 2017 and is below PPG's multiple because of lower margins and slightly lower growth. 3 Unlevered Cost of Equity (*) is based on PPG's estimated unlevered beta of 1.2, a normalized 4% long-term U.S. Treasury rate, and a 6% market risk premium Assess DPC's fit within DuPont. What are its prospects going forward as a division within DuPont versus its potential value to an outside party? 2. How attractive is DPC as an acquisition from a strategic buyer's or PE firm's perspective? What are the potential risks to such a deal? What are some of the important features of APV, and why is it a useful approach for valuing an LBO? 3. Working from case Exhibit 9. relative to the stand-alone value, estimate the dollar increase in DPC's value if a PE fund can obtain: a. 5% revenue growth per annum (versus 4% growth) in each of the next five years and improve the operating margin to 12% (versus 10%). b. Assume part a and that the division can be sold at 7.5x EBITDA in five years. c. Assume part a and part b and that debt financing equal to 6.0x forward EBITDA can be obtained. Assume that all cash available to pay debt each year (i.e., residual cash flow) is used to pay down the LBO debt and that, after five years, the firm will revert to an all-equity firm. d. What are some of the advantages and risks of using leverage to finance the investment? 4. If a PE sponsor has a target return of 20% on its funds (equity contribution), what is the maximum enterprise value it can offer for DPC under parts b and c above? What minimum bid should Ellen Kullman set if she chooses to sell DPC? Exhibit 9 DuPont Corporation: Sale of Performance Coatings Stand-Alone Valuation (dollars in millions) PPG Industries Metric Actual 2011 Sales Growth (%) 10.9% EBIT Margin (Pretax) EV/EBITDA 2012 (x) 11.2% 7.3 2012E Projected 2013E 4.1% 4.3% 11.0% 12.0% DuPont Performance Coatings Metric Projected 2011A Closing 2012E 2013E 2014E 2015E 2016E Sales Growth (%) 12.5% 4.0% 4.0% 4.0% 4.0% 4.0% Depreciation and Amortization $104 $115 $118 $122 $125 $130 EBIT Margin (Pretax) 6.3% 10.0% 10.0% 10.0% 10.0% 10.0% Tax Rate 25% 25% 25% 25% 25% 25% Capital Expenditures $80 $115 $122 $132 $144 $150 Net Working Capital (%) 15.0% 15.0% 15.0% 15.0% 15.0% Terminal EBITDA Multiple (*) 2 7.0 Debt/EBITDA 2012 (*) N/A Debt Blended Interest Rate on Debt 6.75% Unlevered Cost of Equity³ 11.2% Exhibit 9 (continued) Stand-Alone Valuation (continued) APV Analysis 2011A Closing 2012E 2013E 2014E 2015E 2016E Net Sales $4,281 $4,452 $4,630 $4,816 $5,008 $5,208 EBITDA $372 $560 $581 $604 $626 $651 Depreciation and Amortization $104 $115 $118 $122 $125 $130 Pretax Operating Income (EBIT) $268 $445 $463 $482 $501 $521 Interest Expense $0 $0 $0 Eamings before Taxes $445 $463 $482 $501 $521 Taxes ($111) ($116) ($120) ($125) ($130) Net Income $334 $347 $361 $376 $391 Increase in Net Working Capital ($26) ($27) ($28) ($29) ($30) Capital Expenditures ($115) ($122) ($132) ($144) ($150) Residual (Levered) Cash Flow $308 $317 $323 $327 $341 Unlevered Free Cash Flow (FCF) $308 $317 $323 $327 $341 Terminal Value $4,738 Unlevered FCF, including TV $308 $317 $323 $327 $5,079 Enterprise Value (EV) $3,970 Interest Tax Shield PV Tax Shield EV with Tax Shield $3,970 Data sources: Historical information for DPC is from DuPont company Databooks. Projections are case writer estimates. PPG's enterprise value is based on prices at the end of January 2012. PPG's projections are based on Buckingham Research Group analyst report, PPG Industries: "Other" Industrial Coatings Review, May 21, 2012. Notes to stand-alone model DPC's estimated average tax rate of 25% is lower than the US. marginal corporate tax rate as a result of international operations taxed at lower rates. * Assumed forward exit multiple for Terminal Value is based on projected EBITDA growth in 2017 and is below PPG's multiple because of lower margins and slightly lower growth. 3 Unlevered Cost of Equity (*) is based on PPG's estimated unlevered beta of 1.2, a normalized 4% long-term U.S. Treasury rate, and a 6% market risk premium
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Assessing DPCs fit within DuPont and its prospects as a division within DuPont versus its potential value to an outside party To assess DPCs fit within DuPont you would need to consider factors such a... View the full answer
Related Book For
Advanced Financial Accounting
ISBN: 978-0137030385
6th edition
Authors: Thomas Beechy, Umashanker Trivedi, Kenneth MacAulay
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