Bw/Ip International, Inc Case

Valuation of Corpo array Finance BUFN 750 BW/IP International, Inc 1? BW/IP is a good candidate for the leverage buyout. * Steady cash fertilise (around 30 million per year). * Strong management team. * Positive NPV (about 61. 5 million) The NPV of BW/IP is 61. 5million(301-239. 5). Thus, we are rather optimistic about this BW/IPs project. Calculating the NPV. Method APV VL=VU+PV (ITS). We can adhere the post paid schedule from the BW/IPs projected operating movement, which means there is a pre-determined interest paid to debt holders.Assumption Tax count 38%. From 1991 to 1993, the assess rate remains to be constant, which is 38%. And we assume that the tax rate will continue to be 38%. demo 1 shows the do work of calculating tax rate harvest-time rateWe assume the project will last for infinity, and leaven in perpetuity after year 1992. And we use the average every year growth rate from 1990 to 1993 as our perpetuity growth rate, which is 2. 3%. reposition in NWCWe subtract cash from NWC provided in the case and we bring in the adjusted change in NWC.The calculation is presented in stage 2. Discount rateTypically, the investment sensible horizon of a common leverage buyout range from 5 to 10 historic period, so we use the ten years exchequer yields, ending at 1987 as the happen free rate, which is 8. 79%. For the market contain, we use the S&P 500 index in 1980s, which is 12. 79%. Thus, we can easily get the risk premium. evince 3 shows the process of calculating discount rate. Tax shieldsGiving the interest paid schedule, we can course 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 cost 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), instead of the total assets. We assume the merged borrowing rate is the same with BBB long-term 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%. showing 4 shows the affect of calculating tax shields.The FCF is presented in give 5. Sensitivity Analysis for BW/IP is presented in acquaint 6 2? We favor the proposed acquisition of UCP. The primary sources of value in the transaction include * pocket-sized chief city or cash requirement UCP is a small firm, which would require additional borrowing by BW/IP of only 13 million. * Synergy and efficient gains. UCPs product line complemented BW/IPs extremely well because UCPs most attractive feature was its installed base in the petroleum industry and together they would have the largest installed base in the petroleum segment. Improved management takeover can improve management because interest and principal payments can force management to improve performance and operating efficiency. The proposed pr ice is reasonable, because it is higher than the levered value of the project, which is 48. 17. Method 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 average 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(a) features of the BW/IP buyout affect the companysdecisions about long-horizon opportunities such as the UCP acquisition? What are the advantages and disadvantages of the 1987 buyout, viewed as a monetary program? After the buyout, BW/IP became a privately owned company which was less babelike from Borg-Warner Corporation than before in decision making.For the opportunities that the managers favored, such as the UCP acqui sition, the company had more luck to ingest on the deal. However, for the case in which larger amount of financing is required, the company may not be competitive enough without Borg-Warners financial support. The buyout could generateda better and a more efficient management, by ever-changing the corporate structure (including modifying and replacing 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 also considered to be a risky project, which may be easily affected by political economy environment. The chance of success tends to be larger under steadily growing economy, while smaller in recession periods. 4. As one of BW/IPs bankers, would you approve the companys pass on 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 bigger 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 pilot light 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 were experienced and respected in the financial community will affect ban kers 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 otherwise real 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 Hint Market return 12. 79% S&P 500 index in 1980s Risk premium 4. 00% Exhibit 4 Interest 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 come 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 NWC 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%