Corporate Valuation & Restructuring

Assignment 3

Interco : Company Overvalued or Not?

Indian Institute of Management – Lucknow

Noida Campus, Noida, India - 201307

Submitted to:
Prof. S C Bansal
IIM Lucknow (Noida Campus)

Submitted by:
Rahulselvan T (PGPSM04021)
 Background:
Recently Interco received merger proposal from City Capital Associates Limited
Partnership and they have offered $64 Per common share of Interco on July 28,1988.
Interco’s financial advisors wasserstein, perella &Co and they have established
range of $68-$80 per common share.

Operations
Currently has four major divisions
 Apparel (e.g., London Fog)
 General retail merchandising
 Footware
 Furniture and home furnishings

Free Cash Flow

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Sales Growth in % 7.2 7.2 7.2 7.2 7.2 7.2 7.2 7.2 7.2 7.2
Operating Margin in % 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9 10 10.1
Net sales 3341423 3582005.456 3839910 4116383 4412763 4730482 5071077 5436194 5827600 6247187 6696985
Earning from operation 329544.502 357111.6 386940 419212.5 454126.3 491894.4 532747 576932.4 624718.7 676395.5
Earning before tax 329544.502 357111.6 386940 419212.5 454126.3 491894.4 532747 576932.4 624718.7 676395.5
Less: Income tax at 42.8% 141045.0468 152843.8 165610.3 179422.9 194366 210530.8 228015.7 246927.1 267379.6 289497.3
Net Income 188499.4551 204267.8 221329.7 239789.5 259760.2 281363.6 304731.3 330005.3 357339.1 386898.2
Less: Working Capital Inventory 0 0 0 0 0 41585.54 45039.29 48774.79 52814.72 57183.55
FCFF 188499.4551 204267.8 221329.7 239789.5 259760.2 239778.1 259692 281230.5 304524.4 329714.6
Terminal Value 2775549
FCFF 188499.4551 204267.8 221329.7 239789.5 259760.2 239778.1 259692 281230.5 304524.4 3105263

WACC Calculation
Assumptions
Risk Free Rate – 9.10 % (30-year Treasury Bonds)
Risk premium (Rm-Rf) – 7% based on Historical returns
Beta – 1
Rd -10.1 (10-year BBB rated bond yield)
D/V= 318.5/2943.5=.11
E/V=2625/2943.5=0.89

WACC = (1-0.41)*0.101*0.11+(0.091+1*0.07)*0.89
 = 0.149

Terminal value
Long term growth rate = 2.7%
Cost of equity = 14.9%

NPV of FCFF at 10% 2557707.151

NPV of FCFF at 11% 2397536.978
NPV of FCFF at 12% 2250628.843
NPV of FCFF at 13% 2115721.112

No of outstanding shares 41356847

NPV Share Price ($)
Discount Rate 10% 2557707.151 61.84482949
Discount Rate 11% 2397536.978 57.97194786
Discount Rate 12% 2250628.843 54.41973958
Discount Rate 13% 2115721.112 51.15769855

The share prices are ranging from $51-$61, It shows that the firm is overvalued by
the market.