Bw/Ip International, Inc Case
Valuation of Corporate Finance
BUFN 750
BW/IP International, Inc
1、BW/IP is a good candidate for the leverage buyout. * Steady cash flow (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 quite optimistic about this BW/IP’s project.
Calculating the NPV.
Method: APV: VL=VU+PV (ITS).
We can get the interest paid schedule from the BW/IP’s projected operating performance, which means there is a pre-determined interest paid to debt holders.
Assumption:
Tax rate: 38%.From 1991 to 1993, the tax rate remains to be constant, which is 38%. And we assume that the tax rate will continue to be 38%. Exhibit 1 shows the process of calculating tax rate:
Growth rate:We assume the project will last for infinity, and grow in perpetuity after year 1992. And we use the average annually growth rate from 1990 to 1993 as our perpetuity growth rate, which is 2.3%.
Change in NWC:We subtract cash from NWC provided in the case and we get the adjusted change in NWC. The calculation is presented in Exhibit 2.
Discount rate:Typically, the investment horizon of a common leverage buyout range from 5 to 10 years, so we use the ten years treasury yields, ending at 1987 as the risk free rate, which is 8.79%.For the market return, we use the S&P 500 index in 1980s, which is 12.79%. Thus, we can easily get the risk premium. Exhibit 3 shows the process of calculating discount rate.
Tax shields:Giving the interest paid schedule, we can figure 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 corporate borrowing rate is the same with BBB long-term bond, which is the cost of debt, 10.63%.
BUFN 750
BW/IP International, Inc
1、BW/IP is a good candidate for the leverage buyout. * Steady cash flow (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 quite optimistic about this BW/IP’s project.
Calculating the NPV.
Method: APV: VL=VU+PV (ITS).
We can get the interest paid schedule from the BW/IP’s projected operating performance, which means there is a pre-determined interest paid to debt holders.
Assumption:
Tax rate: 38%.From 1991 to 1993, the tax rate remains to be constant, which is 38%. And we assume that the tax rate will continue to be 38%. Exhibit 1 shows the process of calculating tax rate:
Growth rate:We assume the project will last for infinity, and grow in perpetuity after year 1992. And we use the average annually growth rate from 1990 to 1993 as our perpetuity growth rate, which is 2.3%.
Change in NWC:We subtract cash from NWC provided in the case and we get the adjusted change in NWC. The calculation is presented in Exhibit 2.
Discount rate:Typically, the investment horizon of a common leverage buyout range from 5 to 10 years, so we use the ten years treasury yields, ending at 1987 as the risk free rate, which is 8.79%.For the market return, we use the S&P 500 index in 1980s, which is 12.79%. Thus, we can easily get the risk premium. Exhibit 3 shows the process of calculating discount rate.
Tax shields:Giving the interest paid schedule, we can figure 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 corporate borrowing rate is the same with BBB long-term bond, which is the cost of debt, 10.63%.