Monmouth Case Solution
Monmouth Case solution
1. To escape their dependency on a single industry, Monmouth managed to reduce their business risk by acquiring small different industrial manufacturers in addition to becoming a market player in the hand tool business, by acquiring 3 of the market leaders, a move that diversified Monmouth’s business and ultimately reduced their business risk.
In analyzing the financial risk, the continuous acquisitions have definitely increased the operational risk for the company. Since the case didn’t provide us with the financial statements for Monmouth, we can assume that in order to complete the acquisition they have to issue stocks as they exhausted (or will pretty soon exhaust) their debt capacity.
2. Based on the DCF valuation and using a WACC of 8.25% (the beta assumed to be 1, the average beta of comparable firms and the coupon rate to be 7.96%, the rate for BB rated companies) and a growth rate of 5.5%. The fair price is $40.4 per share for Robertson, lower than the $50 offered by Simmons to sell their stocks but higher than the current market price of $30. As for the peer multiples, and due to the lack of information for the comparable companies we only managed to calculate the EBIAT multiple, the earnings multiple and the book value multiple using the three comparable companies, Actuant Corp, Snap On Inc., and Stanley Works. The result of the multiple valuation showed a fair price of $40.1 per share based on the EBIAT multiple and a value of $29.61 per share based on the earnings multiple. Both prices are below the fair price calculated by the DCF. Only the book value multiple exceeded the DCF fair value with a value of $65.25. The first two multiples failed to capture the future potential and growth of the corporation, where the DCF managed to include it as a factor in the calculations.
3. Simmons is eager to sell the price at $50 per share mainly for capital gain, since they bought it at $42, and they also understand that the
1. To escape their dependency on a single industry, Monmouth managed to reduce their business risk by acquiring small different industrial manufacturers in addition to becoming a market player in the hand tool business, by acquiring 3 of the market leaders, a move that diversified Monmouth’s business and ultimately reduced their business risk.
In analyzing the financial risk, the continuous acquisitions have definitely increased the operational risk for the company. Since the case didn’t provide us with the financial statements for Monmouth, we can assume that in order to complete the acquisition they have to issue stocks as they exhausted (or will pretty soon exhaust) their debt capacity.
2. Based on the DCF valuation and using a WACC of 8.25% (the beta assumed to be 1, the average beta of comparable firms and the coupon rate to be 7.96%, the rate for BB rated companies) and a growth rate of 5.5%. The fair price is $40.4 per share for Robertson, lower than the $50 offered by Simmons to sell their stocks but higher than the current market price of $30. As for the peer multiples, and due to the lack of information for the comparable companies we only managed to calculate the EBIAT multiple, the earnings multiple and the book value multiple using the three comparable companies, Actuant Corp, Snap On Inc., and Stanley Works. The result of the multiple valuation showed a fair price of $40.1 per share based on the EBIAT multiple and a value of $29.61 per share based on the earnings multiple. Both prices are below the fair price calculated by the DCF. Only the book value multiple exceeded the DCF fair value with a value of $65.25. The first two multiples failed to capture the future potential and growth of the corporation, where the DCF managed to include it as a factor in the calculations.
3. Simmons is eager to sell the price at $50 per share mainly for capital gain, since they bought it at $42, and they also understand that the