Evaluating an Offer to Purchase Spartan Industries Assignment

Evaluating an Offer to Purchase Spartan Industries Assignment

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Evaluating an Offer to Purchase Spartan Industries Assignment

It is 2019 and you are an investment banker evaluating an offer to purchase Spartan Industries, Inc. (“Spartan”). The offer presents a 10% premium to the existing stock price. However, you have reason to believe the market price maybe undervalued. In particular, you feel like the implied Beta of 1.6 is too high resulting in a higher discount rate. As a financial analyst you must determine the value for Spartan. You have historical stock price and S&P price information.

You are uncertain of Spartan’s Cost of Debt (rd.), but you are aware of the following: 1.In 2018, a direct competitor issued $97 million in debt with an interest rate of 8.25%; 2.Additionally, Spartan has 125million shares outstanding with a current stock price of $11.23/share Additionally, you know the following: Benchmark Treasury Yield US 3-MO 1.556% US 2-YR 1.68% US 5-YR 1.751% US 10-YR 1.945% US 30-YR 2.427% • The historical market risk premium is 8%. • See spreadsheet for historical price information. Assignment:

1. Calculate the following for Spartan: a. Free Cash Flow; b. Weighted Average Cost of Capital (“WACC”) c. Residual Value (using both the “Perpetuity with Growth” and “PVGO = 0” methods); d. Final Per-Share Valuation (Use “Perpetuity with Growth” and “PVGO = 0” methods).

Instructions and Hints: 1. Financial Statements:

2. Use the pro-forma information provided in the solution to HW#2.
3. Use the following financial periods: I. Last historical period should be 2018 (which you need to calculate for purposes of showing changes to fixed assets and working capital in 2019). ii. Pro-forma period should be 2019-2023. iii. Residual (terminal) period should be 2024.
4. For purposes of calculating net working capital for the period 2019-2023, use the following net working capital/sales ratio: .24/1, or 24%. 2. Use the Short-and Long-Term Debt figures provided in the solution to HW #2.
5. Calculate Net Fixed Assets (i.e., PPE & Other Fixed Assets) using the solution to HW #2.
6. WACC: Use market values and Cost of Equity from HW #6 5. Hints: a. First, calculate FCF b. Next, calculate WACC c. Next, calculate PV of FCF, Residual Value and its PV. d. Finally, perform the valuation using the Perpetuity with Growth and the PVGO=0 models. (HINT: As between these two models, the only input changing is Residual Value). Insights: What happens to the stock valuation with the implied Beta of 1.6 that the firm offering to purchase the company used? The accompanying spreadsheet offers historical price information, etc. Use the accompanying Excel spreadsheet to calculate Beta, Cost of Equity, the WACC and DCF.

 

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Excellent Quality 95-100%	Introduction 45-41 points The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned.		Literature Support 91-84  points The background and significance of the problem and a clear statement of the research purpose is provided. The search history is mentioned.			Methodology 58-53 points Content is well-organized with headings for each slide and bulleted lists to group related material as needed. Use of font, color, graphics, effects, etc. to enhance readability and presentation content is excellent. Length requirements of 10 slides/pages or less is met.
Average Score 50-85%	40-38 points More depth/detail for the background and significance is needed, or the research detail is not clear. No search history information is provided.		83-76  points Review of relevant theoretical literature is evident, but there is little integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are included. Summary of information presented is included. Conclusion may not contain a biblical integration.			52-49  points Content is somewhat organized, but no structure is apparent. The use of font, color, graphics, effects, etc. is occasionally detracting to the presentation content. Length requirements may not be met.
Poor Quality 0-45%	37-1 points The background and/or significance are missing. No search history information is provided.		75-1 points Review of relevant theoretical literature is evident, but there is no integration of studies into concepts related to problem. Review is partially focused and organized. Supporting and opposing research are not included in the summary of information presented. Conclusion does not contain a biblical integration.			48-1 points There is no clear or logical organizational structure. No logical sequence is apparent. The use of font, color, graphics, effects etc. is often detracting to the presentation content. Length requirements may not be met
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