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SID : B17134
Financial Problems:
1. Valuation
TSE has to find the Standalone value of Yeats as well as its Synergy value.
The firms Vice President wanted to estimate the value of YVC and he was not sure whether
the firm’s share were fully priced or whether the market has not capitalized its full
expectations or not.
The other parameter was the synergy value. Synergy is the concept that the value and
performance of two companies combined will be greater than the sum of the separate
individual parts. Synergy is a term that is most commonly used in the context of mergers
and acquisitions. Synergy, or the potential financial benefit achieved through the combining
of companies, is often a driving force behind a merger. Shareholders will benefit if a
company's post-merger share price increases due to the synergistic effect of the deal. The
Name : Avinash Agrawal
SID : B17134
expected synergy achieved through the merger can be attributed to various factors, such as
increased revenues, combined talent and technology, or cost reduction.
TSE’s greater purchasing power will decrease the cost of procurement of materials and
components. The research expertise of Yeats will also add to the value of TSE as TSE has
huge financial backing which will mean greater diversion of funds towards research and
development.
4. Control
The control of the TSE after the acquisition was also an issue. As far as, TSE is considered
its holdings are distributed among many shareholders and any single family or organisation
doesn’t have a significant holding in the firm. But, as far as Yeats was considered, 70% of
the companies share belonged to the board of directors and their families, including the
20% owned by Auden and 40% by Yeats and his family. Auden did not oppose to the
merger but it was not interested in the tag of minority stakeholders in a company like TSE
Therefore, Auden wanted to sell its part of shares and did not want to maintain an relation
with Yeats when it would operate as a division of TSE International.
Name : Avinash Agrawal
SID : B17134
5. Dilution
The dilution of shares occur in these three cases:
Conversion by holders of optionable securities: Stock options granted to individuals, such
as employees or board members, may be converted into common shares, boosting the total
share count.
Secondary offerings where the firm is looking to raise additional capital: A firm may
looking to raise new capital to fund growth opportunities or to service existing debt may
issue additional shares to raise the funds.
Offering new shares in exchange for acquisitions or services: Instead of paying for an
acquisition with shares, new shares might be offered to shareholders of the firm being
purchased. For smaller businesses, new shares could be offered to individuals for services
provided. For example, special counsel could be offered shares for representing the firm or
in exchange for other legal services.
The dilution of the earning per share of the new entity was also a concern for the
shareholders. Through the stock exchange programme and the stock options that will be
given to the employees, new shares of the company will have to be released and this would
mean an increase in the no. of outstanding shares and thus it would hamper the growth of
the shares and also result in a decrease in the value of the forecasted earnings per share.
TSE Yeats
Total Assets 1,245,825,000 421,24,000
Total Liabilities 3500,88,000 53,60,000
Total Shares
626,94,361 14,40,000
Outstanding
Book Value per share 14.29 25.53
All Prices are in dollars.
Therefore, in case both the company liquidate, the shareholders of Yeats will be paid
more than that of TSE.
3. Market share price method
Based on the exhibits, the market price of TSE is $21.98 whereas that of Yeats is $39.75.
It means that the demand of Yeats share is more than TSE in the market. This also means
that
4. DCF Model
Evaluation of WACC:
𝐷 𝐸
𝑊𝐴𝐶𝐶 = ∗ 𝑟𝑑 (1 − 𝑡) + ∗𝑟
𝐷+𝐸 𝐷+𝐸 𝑒
𝑟𝑒 = 𝑟𝑓 + 𝛽 ∗ (𝑟𝑚 − 𝑟𝑓 )
TSE International
Tax 40%
Beta 0.85
Debt 1191,00,000
Cost of debt 6%
Risk Free 6.60%
Risk Premium 5.50%
Cost of equity
11.28%
C/S
Equity Value 1415883880
D/(D+E) 0.08
E/(D+E) 0.92
WACC 10.87%
Growth Rate 10.83%
𝐻
𝐹𝐶𝐹 𝐹𝐶𝐹𝐻
𝑃𝑉 = ∑ 𝑖
+
(1 + 𝑟) (1 + 𝑟)𝐻
𝑖=1
Where, FCFs can be obtained from exhibit 3 and r (discount rate) is WACC of given financing
situation. The given long term growth rate is 4.75%.
Cash Flow
Net Income $1,47,961 $1,76,101 $1,89,036 $2,01,323 $2,16,097 $2,08,567
Depreciation $26,800 $27,950 $29,770 $31,700 $33,170 $35,960
Operating
Cash Flow $1,74,761 $2,04,051 $2,18,806 $2,33,023 $2,49,268 $2,44,527
Capital
Expenditure
Working
Capital
Free Cash Flow $1,74,761 $2,04,051 $2,18,806 $2,33,023 $2,49,268 $2,44,527
Terminal Cash
Flow $59,59,306
Total $1,74,761 $2,04,051 $2,18,806 $2,33,023 $2,49,268 $62,03,833
PV of FCF $10,13,975 $1,83,685 $1,77,310 $1,69,985 $1,63,686 $1,44,548
PV of TCF $35,57,340
Total $45,71,315
Debt $30,900
Firm Value $45,40,415
Shares $64,416
Value per
share $70
The value of a share of TSE is 70 dollars as per DCF and value of the firm is $4,540,415,000
Actual Projected
1999 2000 2001 2002 2003 2004
Sales $49,364 $59,600 $66,000 $73,200 $81,200 $90,000
Cost of goods
sold $37,044 $42,316 $47,850 $52,704 $58,058 $63,900
Gross profit $12,320 $17,284 $18,150 $20,496 $23,142 $26,100
Selling, general,
admin. $2,936 $3,612 $4,024 $4,464 $4,952 $5,492
Other income,
net $228 $240 $264 $288 $320 $352
Depreciation $1,508 $1,660 $1,828 $2,012 $2,212 $2,432
Income before
tax $8,104 $12,252 $12,562 $14,308 $16,298 $18,528
Tax $3,242 $4,901 $5,025 $5,723 $6,519 $7,411
Net Income $4,862 $7,351 $7,537 $8,585 $9,779 $11,117
Cash Flow
Net Income $4,862 $7,351 $7,537 $8,585 $9,779 $11,117
Depreciation $1,508 $1,660 $1,828 $2,012 $2,212 $2,432
Operating Cash
Flow $6,370 $9,011 $9,365 $10,597 $11,991 $13,549
Capital
Expenditure $1,826 $2,011 $2,213 $2,433 $2,675
Working Capital - $3,492 $3,867 $4,289 $4,757 $5,273
Free Cash Flow $6,370 $3,693 $3,488 $4,095 $4,800 $5,601
Terminal Cash
Flow $1,54,406
Total $3,693 $3,487 $4,095 $4,801 $1,60,007
PV of FCF $6,370 $3,215 $2,644 $2,703 $2,759 $2,803
PV of TCF $77,270
Total $97,764
Debt $0
Yeats Value $97,764 $6,420 $1,04,184
Shares $1,440
Value per share $68
The value of the share is $68 and that of the firm is $97,764,000
Valuation after merger
Actual Projected
1999 2000 2001 2002 2003 2004
Sales $22,36,572 $23,88,973 $25,46,785 $27,15,237 $28,94,969 $30,86,658
Cost of goods sold $18,30,555 $19,52,402 $20,82,094 $22,19,174 $23,65,349 $25,21,160
Gross profit $4,06,017 $4,36,571 $4,64,691 $4,96,063 $5,29,620 $5,65,498
Selling, general,
admin. $1,23,232 $1,29,398 $1,35,506 $1,44,492 $1,51,268 $1,61,318
$228 $240 $264 $288 $320 $352
Depreciation $28,308 $29,610 $31,598 $33,712 $35,382 $38,392
Income before tax $2,54,705 $2,77,803 $2,97,852 $3,18,147 $3,43,290 $3,66,140
Pretax saving $1,500 $3,000 $3,000 $3,000 $3,000 $3,000
Tax $1,02,482 $1,12,321 $1,20,341 $1,28,459 $1,38,516 $1,47,656
Net Income $1,53,723 $1,68,482 $1,80,511 $1,92,688 $2,07,774 $2,21,484
$0 $0 $0 $0 $0 $0
Cash Flow $0 $0 $0 $0 $0 $0
Net Income $1,53,723 $1,68,482 $1,80,511 $1,92,688 $2,07,774 $2,21,484
Depreciation $28,308 $29,610 $31,598 $33,712 $35,382 $38,392
Operating Cash
Flow $1,82,031 $1,98,092 $2,12,109 $2,26,400 $2,43,156 $2,59,876
Capital
Expenditure $0 $1,826 $2,011 $2,213 $2,433 $2,675
Working Capital $0 $3,492 $3,867 $4,289 $4,757 $5,273
Free Cash Flow $1,81,131 $1,92,774 $2,06,231 $2,19,898 $2,35,966 $2,51,928
Terminal Cash
Flow $78,14,002
Total $1,81,131 $1,92,774 $2,06,231 $2,19,898 $2,35,966 $80,65,930
PV of FCF $1,81,131 $1,73,874 $1,67,775 $1,61,354 $1,56,168 $1,50,386
PV of TCF $46,64,480
Total $56,55,168
Debt $30,900
Equity $56,24,268
Shares $65,856
Value per share $85
The value of the share after merger is $85 and value of the firm is $5,655,168,000
Synergy=$5,655,168,000-$97,764,000-$45,40,415000=1,016,989,000
As TSE wants to bag the deal, it should offer 20% of this price to the other firm therefore
valuation of Yeats=301161000.8
And therefore, it should offer 301161.8/85=3543000.08 shares to Yeats.
No. of shares given per share of Yeats=3543000.08/1440000=2.46
Recommendation:
1. The stock to stock exchange ratio of that TSE should offer to Yeats is 2.46 per share
of TSE.
2. It should definitely try to hold on the efficient management system of Yeats as Bill
Yeats is retiring therefore, the role of top management will become vital once he
retires.
3. TSE should bag this deal because Yeast due to its R&D is forecasted to grow at
10.83% whereas TSE inspite of being a large firm is just projected to grow at 7.3%.