Reference no: EM132411881

Question 1:

Walker Industries is a medium-sized company that specializes in Cryogenics - a relatively new process for hardening metals to make them resistant to wear. Cryo-technology has been shown to greatly extend the life of internal combustion motors used in marine and racing applications such as Formula One, NASCAR, and IRL. It is anticipated that cryo-technologies will be increasingly incorporated in the automotive and related industries in the future. Although most companies specializing in cryogenics have performed well in the past few years, the stock price of Walker Industries has lagged behind for some reason. As a member of the M&A analysis team for Lucas Oil Products (LOP), you have been assigned the task to (a) estimate the value of Walker Industries using the FCF valuation approach (using historical figures as the appropriate FCF valuation input parameters to start with), and (b) determine if there is any logical reason to pursue Walker Industries further as an acquisition target.

Input parameters for valuing Walker Industries using the FCF approach

Note: g, b, T, are based on historical estimates over the past 3 years.
X0 = EBIT = $2.9 million
g = growth rate of EBIT (3 year historical) = .20
b = ratio of reinvestment (3 year historical) = .70
T = Tax rate = .35
K = Cost of capital = .13

a) What is the value of Walker Industries assuming that it reinvests at its historical rate (b) for the next 8 years and experiences its historical rate of growth from investment? Assume net reinvestment to be zero after the 8-year period and thus a constant EBIT as a result. Apply both the spreadsheet approach and the formula approach here to show their equivalence.

b) What is the implied value per share of Walker Industries stock assuming that the company has $7 million of debt outstanding (7% interest rate) and 4.3 million outstanding shares of stock?

c) Suppose the current stock price of Walker Industries is $5.00 per share. Given your understanding of ‘typical' takeover premiums and assuming you are confident that your per-share valuation in part b) above is accurate, would you advise LOP to make an acquisition offer? If so, at what price per share? Clearly explain your reasoning.

d) Now suppose that net reinvestment does not fall to zero (as it does in part a. above) after the first 8 years. Instead, assume that after the first 8 years (i.e., the projections would remain the same as above for the first 8 years) the reinvestment rate would then be 0.20 in perpetuity and the resulting rate of growth would become 2.5% in perpetuity. How would this change your answer to part d) above? Show how you arrived at your answer using both the formula approach and the spreadsheet approach and make sure to clearly explain your findings.

Question 2:

A. Suppose that your boss just turned to you for insights on the concept of Economic Value Added (EVA) for performance evaluation purposes. His newly acquired interest in EVA developed after he received a notice last month from corporate headquarters indicating that the company will soon be adopting the concept of EVA as a supplemental decision-making tool - primarily to evaluate the year-to-year performance of the firm's respective divisions. Because your boss is not familiar with the concept (one of the many dinosaurs that remain in the business world), he is quite concerned about its application and how it relates to traditional capital budgeting theory that suggests to invest in all + NPV projects. "I just don't get it", he proclaims, "we all know that the appropriate goal for a financial manager has been, and always will be, to invest in projects that add value for shareholders. Joe, from corporate HQ said that some punk professor from the Kelley School of Business is responsible for convincing the higher-ups to move in this direction. .....If I could just get my hands on that guy, I would tear him in half. I am scheduled to retire in 3 years and I don't need this kind of pressure at my age!" Recognizing that your boss is clearly concerned - primarily because he does not understand the direct relation between NPV and EVA, you offer your assistance (note: this is the first time you learned that your boss was planning to retire in 3 years - what a great opportunity for you to show how much you really know!). Reluctantly, you state, "Um, boss, NPV and EVA are entirely consistent." As his beady eyes roll your way, you feel a drop of sweat form on your temple. "What do you mean by entirely consistent insert your name here?" (Maybe you have just screwed up? You had a comfortable position with a good salary and now your neck is possibly on the chopping block!) With your nervousness clearly showing through, you reply "BBBBoss, in theory, the present value of all future EVA is the same as NPV." Without wasting any more time, your boss counters "Here are some hypothetical figures for a project.

Calculate the period by period EVA for this project and then tabulate the PV of all future EVA." He then adds, "I already know the project's NPV because I have calculated it myself! We'll compare the present value of your EVA figures with my NPV figure when you complete your EVA calculations."

Cash Flow Information	T = 0	T = 1	T = 2	T = 3	T = 4 to infinity
Sales		$90k	$120k	S180k	$111k
Costs		$27k	$40k	560k	$37k
Depreciation		$20k	$30k	$40k	$30k
Capital Investment	$190k	$30k	$40k	$30k	$30k
NWC Investment	$20k	$10k	$10k	$0k	$0k

Additional information: Debt / Equity = 0.5 (target); Rf = 4%; β = 1.0; market risk premium = 7.5%. The firm's bonds have a $1,000 face value, pay semi-annual coupons (coupon rate = 9%), mature in 10 years, and are currently selling in the open market for $984.64. The marginal tax rate is 30%. B. Hopefully by now you have convinced your boss that the concept of EVA (or alternatively, period by period economic profit) is in theory, consistent with NPV. If this is the case however, and a company accepts only projects that it determines to be +NPV, doesn't calculating EVA provide redundant information? After all, the projects that were accepted in the past were all +NPV, so they would, when aggregated, produce a positive EVA, right? So what are the benefits (and potential weaknesses) of also calculating EVA to assess divisional performance?

Question 3:
You have been hired as a financial consultant to a mid-cap company's Board of Directors to educate them with regard to how the stock market reacts when acquiring firms make acquisition announcements. One of the most outspoken members is convinced that acquisitions destroy value and should never be pursued. Others argue that acquisition market reactions and success depend on a variety of factors, including the motivation for the acquisition and the form of payment. The company has already identified what they believe to be an undervalued target and is debating whether to pursue the acquisition and if so, what form of payment should be used. The Board is particularly interested in whether the market reacts differently to acquisition announcements depending upon the method of payment, and if so, seeks an explanation why. While the Board has a recent list of completed acquisitions and the method of payment used (cash or stock), none of the Board members has the ability to conduct an event study analysis and they are not all that familiar with the literature, so they have turned to you for help. They request that you utilize the acquisition data they have provided you to conduct 2 different event studies and interpret and explain the results. The requested event studies are as follows: (1) acquirer announcement returns when the form of payment is cash, and (2) acquirer announcement returns when the form of payment is stock. In order to conduct the event study analysis, use the EVENTUS software available on WRDS (access instructions can be found under the "Extras" module under the modules tab) to conduct the event study using only the default market model which is selected by default as the benchmark model (i.e., uncheck MAR). Use the following settings: Use the CRSP value-weighted index to proxy for the overall market, end the estimation period for the market model 50 days prior to the event date, require a minimum of 50 days in the estimation period and a maximum of 250. Select alternative window lengths of (-1, 0) and (0, +5). In step five using Eventus (tests to search), select Patell = Original (which will return a Z-score) and PValue (which provides a p-value indicating significance level). Report the results of your analysis to the Board and make sure to explain whether the market reacts differently according to the method of payment used in the acquisition and if so, provide a detailed explanation as to why this is the case.

Question 4:
Taro Announces Commencement of Tender Offer to Repurchase up to $225 Million in Value of Its Ordinary Shares November 15, 2019 08:00 AM Eastern Standard Time

HAWTHORNE, N.Y.--(BUSINESS WIRE)--Taro Pharmaceutical Industries Ltd. (NYSE: TARO) ("Taro" or the "Company") announced today that it has commenced a modified "Dutch auction" tender offer to repurchase up to $225 million in value of its ordinary shares at a price not greater than $92.00 per share nor less than $80.00 per share, to the seller in cash, less any applicable withholding taxes and without interest, upon the terms and subject to the conditions set forth in the Offer to Purchase and Letter of Transmittal that are being distributed to shareholders (the "Offer"). If the Offer is fully subscribed, the number of shares to be purchased in the Offer represents approximately 6.3% to 7.3% of Taro's currently issued and outstanding shares depending on the purchase price payable for those shares pursuant to the Offer. The NYSE closing price of the shares on November 14, 2019, the last full trading day before today's announcement and commencement of this Offer, was $76.22 per share.

The Offer will expire at 5:00 p.m., New York City time, on Monday, December 16, 2019, unless extended by Taro. Tenders of shares must be made prior to the expiration of the Offer and may be withdrawn at any time prior to the expiration of the Offer. The Offer will not be conditioned upon any minimum number of shares being tendered; however, the Offer is subject to a number of terms and conditions described in the Offer to Purchase.

Tendering shareholders may specify a price not greater than $92.00 per share nor less than $80.00 per share (in increments of $0.50) at which they are willing to sell their shares pursuant to the Offer. On the terms and subject to the conditions of the Offer, the Company will designate a single per share price that the Company will pay for shares properly tendered and not properly withdrawn from the Offer, taking into account the total number of shares tendered and the prices specified by tendering shareholders. The Company will select the lowest purchase price, not greater than $92.00 per share nor less than $80.00 per share, that will allow it to purchase shares having an aggregate purchase price of $225 million, or a lower amount depending on the number of shares properly tendered and not properly withdrawn (such purchase price, the "Final Purchase Price"). Only shares validly tendered at prices at or below the Final Purchase Price, and not properly withdrawn, will be eligible for purchase in the Offer. All shares acquired in the Offer will be acquired at the Final Purchase Price, including those shares tendered at a price lower than the Final Purchase Price. However, due to the "odd lot" priority, proration and conditional tender offer provisions described in the Offer to Purchase, all of the shares tendered may not be purchased if the number of shares properly tendered at or below the Final Purchase Price and not properly withdrawn have an aggregate value in excess of $225 million (based on the Final Purchase Price).

The Company will purchase only those shares properly tendered and not properly withdrawn upon the terms and conditions of the Offer. All shares accepted for payment will be paid promptly after the expiration of the Offer period, to the seller in cash, less any applicable withholding taxes and without interest. At the maximum Final Purchase Price of $92.00 per share, the Company would purchase 2,445,652 shares if the Offer is fully subscribed, which would represent approximately 6.3% of the issued and outstanding shares as of November 14, 2019. At the minimum Final Purchase Price of $80.00 per share, the Company would purchase 2,812,500 shares if the Offer is fully subscribed, which would represent approximately 7.3% of the issued and outstanding shares as of November 14, 2019.

Shares not purchased in the Offer will be returned at the Company's expense promptly following the expiration of the Offer. The Company reserves the right, in its sole discretion, to change the per share purchase price options and to increase or decrease the aggregate value of shares sought in the Offer, subject to applicable law.

In accordance with the rules of the U.S. Securities and Exchange Commission ("SEC"), the Company may purchase in the Offer up to an additional 2% of its outstanding shares without amending or extending the Offer.

As of October 31, 2019, Taro had approximately $1.5 billion in cash and cash equivalents and short-term and long-term marketable securities, a portion of which will be used to fund the Offer.

The Dealer Manager for the Offer is J.P. Morgan Securities LLC, and the Information Agent is MacKenzie Partners Inc. The Depositary is American Stock Transfer & Trust Company, LLC. The Offer to Purchase, Letter of Transmittal and related documents are being mailed to shareholders of record and also will be made available for distribution to beneficial owners of shares. For questions and information, please call the Dealer Manager or the Information Agent toll free at 1-877-371-5947 or 1-800-322-2885, respectively.

Taro's Board of Directors has approved the Offer. However, none of Taro, its Board of Directors, the Dealer Manager, the Information Agent or the Depositary is making any recommendations to shareholders as to whether to tender or refrain from tendering their shares or as to the purchase price or the purchase prices at which shares may be tendered into the Offer. Shareholders must make their own decisions as to how many shares they will tender, if any. In so doing, shareholders should read and evaluate carefully the information in the Offer to Purchase and in the related Letter of Transmittal.

To Do:
Suppose there are two uninformed shareholders and both are debating over whether or not they should tender and at what price. The first shareholder (Oscar) decides to tender at $80.00. The second shareholder (Knowie) is critical of the first, saying "if you can tender for $92.00, why would you choose to do so at $80.00? YOU MEATHEAD!"

Given your understanding of this form of self-tender offer, is Knowie likely to get more money than Oscar because of his intention to tender his shares at a higher price? [NOTE: a complete answer here needs to clearly convey your understanding of how this form of self-tender offer works].

Attachment:- Assignment.rar