Group 6 Abhishek Sinha Abhishek Sharma Amit Jain Sandeep Suman Sumit Aggarwal
39 41 44 67 73
WACC Definition WACC = (D/V)*Rd*(1-T) + (E/V)*Re where V = D + E, Rd is the pretax cost of debt, T is the tax rate and Re is the cost of equity COST OF DEBT Estimate Rd Estimate tax rate After Tax Cost of Debt
6.60% 43.40% 3.74%
COST OF EQUITY = Rf + Beta*MRP Risk free rate as of April 1998 Market risk premium
(Exhibit 8)
6% 7.20%
Equity Beta What is the equity beta for a private firm? We use comparable firms. But, first we need to decompose Kohler into its various groups. Exhibit 4
Kohler Co. Income Statements 1997 by Group (in $ thousands, as of December 31) Kitchen & Bath Group
Power Systems
Interiors Group
Hospitality & R. Estate
1, 4 8 5, 8 3 1
5 4 0, 2 6 0
145,414
50,789
Net Sales
Cost of Sales
1,045,038
461,140
92,564
43,041
Gross Profit
440,793
79,120
52,850
7,748
Selling & Administrative Exp. Amortization of Intangibles
284,097 -
44,600 -
45,580 -
4,872 -
Operating Income after Depr.
156,696
34,520
7,270
2,876
Non-operating Income (Expense) Interest Income Interest Expense
-6,400 1,477 10,181
-269 180 2,428
514 142 1,633
0 12 1,040
6,292
1,848
Pretax Income
Income Tax Expense Net Income
1 4 1, 5 9 1
54,179 8 7, 4 1 1
32,004
11,605 20,398
2,291 4,001
727 1,121
Percentage of Sum of 4 Groups Net Sales Gross Profit Net Income
67% 76% 77%
24% 14% 18%
7% 9% 4%
2% 1% 1%
Comparables (Exhibit 7b) American American Standard Woodmark
Masco
Briggs & Stratton
Stock Market Data as of 4/30/1998
ASD 71,929 48.69 3,502.0
AMW D 7,811 30.25 236.3
MAS 169,634 58 9,838.8
BGG 24,514 45.25 1,109.3
2,762.9 0.82
82.0 0.76
5,937.3 1.28
1,210.0 0.66
Latest Twelve Months Total Debt Sales EBITDA Cash Flow EBIAT
2,404.0 6,139.5 699.3 462.5 292.6
13.4 327.0 37.6 27.4 17.1
1,187.9 3,945.0 838.4 553.4 437.3
259.6 1,327.2 178.3 127.2 80.4
Average of Latest Three Years Total Debt Sales EBITDA Cash Flow EBIAT
2,216.6 5,767.8 667 420.9 263.5
12.3 262.7 30.7 22.1 13.7
1,341.3 3,414.0 721.9 473.6 367.4
155.4 1,282.2 187 132.1 87.1
5,906.0 0.59 0.49
249.7 0.95 0.72
11,026.7 0.89 1.14
1,368.9 0.81 0.53
Ticker Shares Outstanding (in thousands) Stock Price ($) Market Value of Equity Market Value of Equity, Average of Latest 36 Mths. Equity Beta Over Latest 36 Months Financial Data as of 3/31/1998
a
V=D+E
E/V Asset Beta = Equity Beta*(E/V)
These are unlevered betas - assuming a common debt beta equal to 0 Next, relever to Kohler's capital structure Kohler Equity (Exhibit 3a) Kohler Debt
538992 513056 Asset Beta
E/V
D/V
Equity Beta
Avg of Kitchen & Bath Comparables Average of Power Systems Comparables
0.78 0.78
0.81 0.77
0.19 0.23
0.97 1.02
W eighted Average of 80% Kitchen and 20% Power Systems
0.78
0.80
0.20
0.98
WACC
D/V = 1-E/V Use Asset Be Be
Elim. Elim. & Cor Corp. p. Var. Var.
-8 , 8 9 1
(4,398)
Kohler Kohler Co. Co. Con Consol sol..
Sum of 4 Grou Groups ps Sum of 2 Major Major Groups Groups
2,213,403 $
1,637,385
2,222,294 1,641,783 580,511
$ $ $
2,026,091 1,506,178 519,913
-4,492
$ 576,019 $
942 21,618
380,091 $ 21,618
379,149
$
328,697
-27,052
174,310 $
201,362
$
191,216
409 426 (1,251)
-5,746 $ 2,237 $ 14,031 $
-2 4 , 9 6 5
156,770 $
(6,155) 1,811 15,282 181,735
$ $ $ $
(6,669) 1,657 12,609 173,595
68,802 112,931
$ $
65,784 107,809
(6) -2 4 , 9 5 7
68,796
$ 87,974 $
Percentage of Sum of 2 Major Groups Kitc Kitche hen n and and Bath Bath Powe Powerr Sy Systems stems 73% 27% 85% 15% 81% 19%
Cummins Engine
Detroit Diesel
C UM 42,036 54.38 2,285.7
DDC 24,701 23 568.1
2,053.6 1.09
502.5 1.3
1,250.0 5,821.0 487 390.2 224.2
107.4 2,233.0 105.5 82.8 41
686.7 5,431.0 448.3 377.5 221
127.3 2,090.7 100.2 78.2 40.5
3,535.7 0.65 0.70
675.5 0.84 1.09 <----FILL THIS OUT
Rf MRP A-T Rd
Cost of of Eq Equity
6.00% 7.20% 3.74%
A-T Co Cost of of De Debt WACC
12.95% 13.31%
3.74% 11.2% 3.74% 11.1%
13.02%
3.74% 11.2%
Calculate Using CAPM
ta = Equity Beta*(E/V)
Hint: Use Exhibit 7b Each multiple is the ratio of the total enterprise value (MVE+BV of Debt) to the accounting/valuation item
American Standard American Woodmark Masco Briggs & Stratton Cummins Engine Detroit Diesel
Market Total Val Value of Equi Equity ty Debt ebt 3502 236.3 9,838.8 1,109.3 2,285.7 568.1
2404 13.4 1,187.9 259.6 1,250.0 107.4
Average of Kitchen and Bath Comparable Companies Median of Kitchen and Bath Comparable Companies Average of Power Systems Comparable Companies Median of Power Systems Comparable Companies Average of All Six Comparable Companies Median of All Six Comparable Companies Weighted Average 80% Kitchen & Bath, 20% Power Systems
Kohler Co. Total Enterprise Values Implied by Multiples for Comparable Companies (in $ millions)
Sales Multiple Kohler Co. Accounting Items for 12 Months ending 4/30/98
EBITDA Multiple 2,270
194.04
Average of Kitchen and Bath Comparable Companies Median of Kitchen and Bath Comparable Companies
3419.16 2179.20
1826.76 1639.64
Average of Power Systems Comparable Companies Median of Power Systems Comparable Companies
1468.94 1378.81
1380.30 1408.76
Average of All Six Comparable Companies Median of All Six Comparable Companies
2444.05 1956.30
1603.53 1449.25
W eighted Average 80% Kitchen & Bath, 20% Power Systems
3029.12
1737.47
Kohler Co. Values Implied by Multiples --
of interest Total Sales Enterprise Value Multiple 5906 249.7 11,026.7 1,368.9 3,535.7 675.5
Cash Flow Multiple
EBITDA Multiple 0.96
Cash Flow EBIAT Multiple Multiple 12.77 20.18 9.11 14.60 19.93 25.22 10.76 17.03 9.06 15.77 8.16 16.48
2.80 1.03 0.61 0.30
8.45 6.64 13.15 7.68 7.26 6.40
1.51 0.96
9.41 8.45
13.94 12.77
20.00 20.18
0.65 0.61
7.11 7.26
9.33 9.06
16.42 16.48
1.08 0.86
8.26 7.47
11.63 9.94
18.21 16.75
1.33
8.95
13.01
19.28
0.76
EBIAT Multiple
Avearge of 4 Multiples
Median of 4 Multiples
119.13
98.34
1660.22 1521.29
1966.73 1984.50
2218.22 1831.16
1896.74 1812.07
1111.14 1079.47
1615.14 1620.21
1393.88 1371.81
1424.62 1393.78
1385.68 1183.85
1790.93 1647.28
1806.05 1559.17
1697.23 1548.27
1550.40
1896.41
2053.35
1816.94
Valuation date: 4/30/98 Discounted Cash Flow Valuation WACC Perpetuity growth rate
Operating Income after Depreciation Tax Rate Taxes EBIAT
Depreciation and Amortization Amortization Net Capital Expenditures Change in Net Working Capital Free Cash Flow
11% 4% 1998 1999 2000 2001 $ 102,688 126,032 171,619 187,978 44.3% 43.42% 43.42% 43.42% $ 45,451 54,724 74,518 81,621 $ 57,237 $ 71,308 $ 97,101 $ 106,357
$ $ $
56,113 (87,691) (1,435) 24,224
Discounting Period (mid-period) Present Value Present Value of Cash Flows
$
0.17 $23,798 239,479
Terminal Value Present Value of Terminal Value
$
874,192
Total Enterprise Value
$ 1,113,671
87,661 (97,205) (5,762) 56,002
1.17 $49,565
91,786 (96,971) (27,705) 64,211
94,593 (96,811) (17,702) 86,437
2.17 $51,199
3.17 $62,091
You You can change change the the valu valuati ation on by having having a monorit monority y disco disco
2002
$
201,604 43.42% 87,537 114,067
2002 Normalized 201,604 43.42% 87,537 $ 114,067
97,355 (106,647) (23,145) 81,630
-23145 90,922
4.17 $52,827
4.17 $58,840
$1,350,840
unt (start approx 20%) Also tack on discount for market instability (start approx 40%)
