Kohler Case Study
Kohler Case Study
I. Enterprise Value of Kohler
Tax Rate = 34%
Debt to Value = .464 or 681,038/1,467,373
Debt to Equity = .536 or 786,335/1,467,373
Risk Free Rate = 20 yr government bond = 6.0%
Market Return on Debt = 6%
Market Return on Equity = 2002 Net income/ Average Stockholder’s equity 1998-2002 108,229/924,800= 11.7%
WACC: (1-.34)*(.06)*(.464)+ (.117)*(.536)= 8.11%
II. Estimated Share Price of Kohler - $55,400 vs. $270,000
The $55,400 price per share is an undervalued figure because it is presuming that Kohler will remain a private company in the future with the same ownership structure that it presently maintains. After analyzing the projected balance sheets, projected income statements, and projected statements of cash flows Herbert Kohler’s team arrived at the share price of $55,400. However, the shareholders in this case did not know that an eventual IPO would lead to a much higher stock valuation. At the time they did not think there was any reason for Kohler Co. to buy back shares because they believed it would remain private. Since there was such a small public market for the company’s shares, which was already inflated because of speculation of an IPO, a lower price of $55,500 was more reasonable because Kohler was expected to remain private and there was no need for extra compensation in case of windfall on their returns.
Based on the lowest value of Market Value of Equity (MVE) of the comparable firms, we used American Woodmark to value a share price near the approximated price of $55,400. American Woodmark’s market value of equity is $82 and divided by the 3 year average of Earnings Before Interest After Taxes (EBIAT) is $13.7 to find the P/E ratio. After calculating the P/E ratio for American Woodmark, which is 5.99, we multiplied Kohler’s 3-year average Net Income of $73.03 to yield a projected market value of $437,449,700. By dividing the projected market value by 7,587.89, the number of shares outstanding we
I. Enterprise Value of Kohler
Tax Rate = 34%
Debt to Value = .464 or 681,038/1,467,373
Debt to Equity = .536 or 786,335/1,467,373
Risk Free Rate = 20 yr government bond = 6.0%
Market Return on Debt = 6%
Market Return on Equity = 2002 Net income/ Average Stockholder’s equity 1998-2002 108,229/924,800= 11.7%
WACC: (1-.34)*(.06)*(.464)+ (.117)*(.536)= 8.11%
II. Estimated Share Price of Kohler - $55,400 vs. $270,000
The $55,400 price per share is an undervalued figure because it is presuming that Kohler will remain a private company in the future with the same ownership structure that it presently maintains. After analyzing the projected balance sheets, projected income statements, and projected statements of cash flows Herbert Kohler’s team arrived at the share price of $55,400. However, the shareholders in this case did not know that an eventual IPO would lead to a much higher stock valuation. At the time they did not think there was any reason for Kohler Co. to buy back shares because they believed it would remain private. Since there was such a small public market for the company’s shares, which was already inflated because of speculation of an IPO, a lower price of $55,500 was more reasonable because Kohler was expected to remain private and there was no need for extra compensation in case of windfall on their returns.
Based on the lowest value of Market Value of Equity (MVE) of the comparable firms, we used American Woodmark to value a share price near the approximated price of $55,400. American Woodmark’s market value of equity is $82 and divided by the 3 year average of Earnings Before Interest After Taxes (EBIAT) is $13.7 to find the P/E ratio. After calculating the P/E ratio for American Woodmark, which is 5.99, we multiplied Kohler’s 3-year average Net Income of $73.03 to yield a projected market value of $437,449,700. By dividing the projected market value by 7,587.89, the number of shares outstanding we