Taesong,Inc. wishes to make a tender offer for the Goodman Air Conditioning Corp.

, a business that is strategically attractive to Taesong

If acquired, Goodman will continue to operate as a stand alone busness due to the uniqueness of its operations.
Hence Taesong's valuation of Goodman wil be based on Goodman's cost of capital.
We wish to calculate the intrinsic value of Goodman's operations ( the target firm).

INPUT FOR WACC CALCULATION:

Bidder Target
Taesong Goodman
input--- > YTM: R(d) 6.00% 7.00%
input--- > Tax Rate,T 40.00% 40.00%
After Tax Cost of Debt: R(d)*(1-T) 3.60% 4.20%
input--- > Beta 1.50 2.00
input--- > MRP : R(m) - R(f) 7.00% 7.00%
input--- > 10 Year T-Bond, R(f) 5.00% 5.00%
Cost of equity,R(e),use CAPM 15.50% 19.00%
input--- > Debt weight ,W(d) 35% 40%
input--- > Equity weight,W(e) 65% 60%
WACC: r, calculation 11.34% 13.08%

INPUT FOR TARGET FIRM :

input--- > Revenue Growth <= 5 yrs 5.00%

input--- > Perpetual Constant Growth > 5 yrs 3.50%
input--- > COGS as % of Revenue 60.00%
input--- > Operating Expense as % of Revenue 18.00%
input--- > Depreciation (st. line) 850
WACC (Target Firm) 13.08%
Tax rate 40.00%
input--- > Operating Working Capital as % of Revenue 20.00%
input--- > CAPEX per year 1,500.0

Time = 0 1 2 3 4 5
Revenue 9,434 9,906 10,401 10,921 11,467 12,040
COGS 5,943 6,241 6,553 6,880 7,224
Gross Profit 3,962 4,160 4,368 4,587 4,816
Operating Expense 1,783 1,872 1,966 2,064 2,167
Depreciation (st. line) 850 850 850 850 850
EBIT 1,329 1,438 1,553 1,673 1,799
CAPEX 1,500 1,500 1,500 1,500 1,500
Tax 532 575 621 669 720
OWC 1,887 1,981 2,080 2,184 2,293 2,408
∆OWC (94) (99) (104) (109) (115)

Unlevered Free Cash Flow: UFCF 53 114 178 244 315

note: UFCF= EBIT +DEPREC + ∆OWC-CAPEX-TAX

Present Value from T = 1 to 5 years= $ 579

Terminal Value (PV @ T+5 of perpetuity) $ 3,400
Present Value of Terminal Value= $ 1,839 DATATABLE TWO-WAY: EFFECT OF WACC AND PERPETUAL GROWTH RATE ON EV
Enterprise Value = $ 2,417 Perpetual Growth Rate
EFFECT OF WACC & LT_GROWTH ON EV
note: intrinsic value of Target Operations $ 2,417 2.50% 3.00% 3.50% 4.00% 4.50% 2,000
1,900
11.00% 1,800
1,700
Remark: 12.00% 1,600
1,500
Often in a merger, the capital structure of Target will change , especially during first few years after the merger WACC= 13.08% 1,400
1,300
This will cause the WACC to not be a constant, but instead will change from year to year 14.00% 1,200
1,100
1,000
If capital structure is not constant then valuation model needs to enable a dynamic WACC variable 15.00% 2.50% 3.00% 3.50% 4.00% 4.50%
GROWTH RATE

WACC_11% WACC_12% WACC_13% WACC_14% WACC_15%

% CHANGE FROM BASE ESTIMATE
Perpetual Growth Rate
2.50% 3.00% 3.50% 4.00% 4.50%
11.00% #VALUE! #VALUE! #VALUE! #VALUE! #VALUE!
12.00% #VALUE! #VALUE! #VALUE! #VALUE! #VALUE!
WACC= 13.08% #VALUE! #VALUE! #VALUE! #VALUE! #VALUE!
14.00% #VALUE! #VALUE! #VALUE! #VALUE! #VALUE!
15.00% #VALUE! #VALUE! #VALUE! #VALUE! #VALUE!