INTERCO Case Study Memo (due start of class 9/16)
1. Assess Interco’s financial performance. Why is Interco a target of a hostile takeover attempt? 2. As a member of Interco’s board, you are presented a historical “Premiums Paid Analysis” in Exhibit 10. This “Premiums Paid Analysis” documents, for a sample of other companies over the past year, how large the takeover offer was relative to the target’s stock price before the offer was announced. Do you find this historical data useful in assessing whether to accept or reject the Rales’ offer of $70 per share? Why or why not? 3. As a member of Interco’s board, you are presented a “Comparable Transaction Analysis” in Exhibit 11 (I would call this a Market-Multiple Analysis). You are presented various market multiples enjoyed by competitors of Interco arranged by division (e.g., total firm value divided by sales). Do you find these market multiples of Interco’s competitors useful in assessing whether to accept or reject the Rales’ offer of $70 per share? Why or why not? 4. Assume the forecasted cash flows over the next ten years for Interco (given to you on the next page) are correct. Also assume that the terminal value of Interco at the end of year ten is estimated to be 14 times its year ten cash flow of $339 million (the 14 was obtained based on stock price multiples of competitors). a. What is the fair price per share of Interco stock assuming a discount rate (WACC) of 10% is used based on these forecasts? What if the discount rate is 14%? b. Comment on the choice of 10% as the rate to discount Interco’s future cash flows. Too low, too high, just right? Why? Is 14% a more suitable discount rate? Why? c. What long-term growth rate for cash flow is implicitly assumed when the terminal value at the end of year ten is set to equal 14 times year ten cash flow and a discount rate of 10% is used? How about when a discount rate of 14% is used? Are either of these implied growth rates reasonable for Interco? d. What is...
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