Business Analysis and Valuation

(BAV)
BM D & IEV (23-25)
Session 4
Section F
 For Discussion in S 4
• Case on Monmouth Inc
Case on “ Monmouth Inc”
 Monmouth Inc
• What is the business of Monmouth?
• What was the concern of the Management of the firm?
• What did management do to address its concern? And
did the actions help?
• What was the first criteria set by the management for the
future acquisitions?
• What was the second criteria for future acquisitions?
• What was the third criteria for future acquisitions?
 Monmouth Inc
Acquisition of Dessex Rule Company
• What was the business of Dessex Rule Co?
• What did it gain through this acquisition?
• Who were the key people in the firm? And what was their
goal?
 Monmouth Inc
Acquisition of Keane Corporation
• What was the business of Keane Corporation?
• When was it acquired?
• What was the problem with Keane corporation?
• What was expected to happen after the acquisition?
 Monmouth Inc
Acquisition of Kroll Electric Corporation
• What was the business of Kroll Electric Corp?
• What did it gain through this acquisition?
 Monmouth Inc
Initial efforts in acquiring Robertson Tool Company
• Why Monmouth was less successful in acquiring
Robertson?
• When was RTC established?
• Whether the Chairman of RTC had any interest in
acquisition by other firms?
 Monmouth Inc
RTC
• What contributed to the vulnerability of RTC?
• What was its growth rate in sales ? What about its competitors?
• What about its relative profit margins?
• What was its BPS? What was its PB ratio?
• What was its PE Ratio range and what about its competitors?
• Whether stock was trading based on Dividend Yield or Capital Appreciation?
 Monmouth Inc
RTC
• What are your inferences from exhibits 1&2 of the case ?
 Monmouth Inc
RTC
• What made RTC attractive to investors ?
• What was its market share in Clamps & Vises?
• What was its market share in scissors and shears?
• What was its greatest asset?
 Monmouth Inc
Raids by Simmons Company
• What were the businesses in which Simmons was present ?

• How many shares were acquired by Simmons in 2000?

• How many shares were outstanding in 2003? What was the
announcement by Simmons on March 3, 2003?
• What was the fear in the minds of Mgmt of RTC?
• What was the response from Monmouth?
 Monmouth Inc
• What were the interests of NDP Corporation?
• What was the offer from NDP?
• What are your inferences from Exhibit 3 of the case?
• what were the criticism by Simmons on NDP?
• What were the sources of Synergy expected by Monmouth from
RTC’s acquisition?
 Monmouth Inc
• How many shares were acquired by Simmons in the offer?
• What were the total number of shares held by Simmons?
• What were the shortfall in no.of shares to get the majority control of
RTC?
• Why did Simmons want to help Monmouth in acquiring RTC? What
was the price demanded by Simmons?
• What were the questions in the minds of Mr.Vincent?
• What are the contents of Ex 4,5,6 &7?
 Questions
1. Compute the pre-tax cost of debt of RTC using the data
provided in the case . Which one will you consider and why?

2. Compute the Beta for Robertson using the data of

comparable firms? What is the COE for Robertson?

3. What is the WACC for Robertson?

 Questions
4. Consider the figure given in Exhibit 4 of the case for Sales,COGS,SGA,Capex &
Depreciation. Assume NWC as a % of sales for Robertson using its 2002 figures.
Consider 0% growth rate for stable phase and compute the enterprise value for
Robertson based on these assumptions. How much each eq.share in Robertson is
worth as per your calculation?

5. Perform sensitivity analysis for enterprise value by considering the following

[a] WACC=10%; Growth rate in first 4 years at 5% & growth rate in st.phase at 4%
[b] WACC= 10%;Growth rate in first 4 years at 6% & growth rate in st.phase at 4%
[c] WACC= 10%;Growth rate in first 4 years at 0% & growth rate in st.phase at 0%
[d] CGS&SGA at 2002 level [as a % of sales] & Change in NWC at 2002 level
 Questions
6. What is the equity value for Robertson based on [a] EBIAT multiple
and [b] P/E ratio of comparable firms
 Q1 : Monmouth Inc
Compute the pre-tax cost of debt of RTC
using the data provided in the case . Which
one will you consider and why?
Monmouth –COD- Option 1 – Rate the firm
using data in Exhibit 7-3, Exhibits1& 2 of the case
• 4 ratios
1. Times Interest Earned
2. EBITDA/Interest
3. Pre-tax ROC
4. Debt as a % of Capital

Let us compute these ratios for RTC for the year 2002 & then
Assign rating based on data (Median values of key ratios by S&P) given
in Ex 7-3
MM –COD of RTC –
1. Time Interest Earned for the year 2002
Time interest Earned ???
MM –COD of RTC –
1. Time Interest Earned for the year 2002
Time interest Earned = EBIT/Interest expense
For RTC for 2002 = EBIT is not given directly in Ex-1
EBIT= Income before tax + Interest expense = 2.2+0.8 = 3
EBIT/Interest = 3/0.8 = 3.75 times
In Ex 7-3, BB Rated firms have median int.cover of 3.4 times
BBB Rated firms have median int.cover of 5.9 times

On conservative basis, we can assign BB rating for RTC for 2002

MM –COD of RTC –
2. EBITDA/Interest for the year 2002
EBITDA/Interest???
MM –COD of RTC –
2. EBITDA/Interest for the year 2002
EBITDA/Interest expense
For RTC for 2002 = EBITDA is not given directly in Ex-1
EBIT= Income before tax + Interest expense = 2.2+0.8 = 3
EBITDA = EBIT+ D&A = 3+2.1= 5.1
EBITDA/Interest = 5.1/0.8 = 6.38 times
In Ex 7-3, BB Rated firms have median EBITDA/Int of 4.6 times
BBB Rated firms have median EBITDA/Int of 7.6 times

On conservative basis, we can assign BB rating for RTC for 2002

MM –COD of RTC –
3. Pre-tax ROC for the year 2002
Pre-tax ROC ???
MM –COD of RTC –
3. Pre-tax ROC for the year 2002
EBIT/Invested Capital
For RTC for 2002 = EBIT is not given directly in Ex-1
EBIT= Income before tax + Interest expense = 2.2+0.8 = 3
Invested Capital = TA-CL = 47-4= 43
EBIT/IC = (3/43)*100 = 6.98%
In Ex 7-3, B Rated firms have median pre-tax ROC of 8.8%
BB Rated firms have median pre-tax ROC of 12.5%

we can assign B rating for RTC for 2002

MM –COD of RTC –
4. Debt as a% of capital for the year 2002
Debt/Capital % ???
MM –COD of RTC –
4. Debt/Capital % for the year 2002
Debt/Invested Capital
For RTC for 2002 =
Invested Capital = TA-CL = 47-4= 43 ; Debt = 12
Debt /IC = (12/43)*100 = 27.91%
In Ex 7-3, AAA Rated firms have median pre-tax ROC of 12.6%
AA Rated firms have median pre-tax ROC of 36.1%

On conservative basis, we can assign AA rating for RTC for 2002

MM –COD of RTC –
Overall Rating for the year 2002
Let us convert letter rating into scores and then convert the score into a
letter rating
Let us Assign score of
6 for AAA
5 for AA
4 for A
3 for BBB
2 for BB
1 for B
 MM –COD of RTC –
Overall Rating for the year 2002
(AAA-6; AA-5; A-4; BBB-3; BB-2; B-1

Ratio Rating Score

Times Interest Earned BB 2
EBITDA/Interest BB 2
Pre-Tax ROC B 1
Debt/Capital AA 5
Total Score 10
Average score 10/4 = 2.5

Equivalent Rating On Conservative Basis BB

Yield on BB rated Bonds (Exhibit7-1)
= 7.96%
MM- COD of RTC
Using the data from its financial
statements
• COD=???
MM- COD of RTC
Using the data from its financial
statements
• COD= Interest Rate = (Interest Expense/ Debt )*100
= ( 0.8/12 )*100

= 6.67%
 MM- COD of RTC
7.96% vs 6.67%

We shall assume 7.96 % on Conservative Basis

 Q 2: MM
Compute the Beta for Robertson using the
data of comparable firms (Exhibit 6)? What is
the COE for Robertson?
Q2 : Beta of comparable firms
Average Asset Beta of all the firms excluding RTC ( refer Ex-6 )

= [0.71 + 0.63+0.80+0.63+0.85+0.73 ] / 6

= 0.725

Levered or Equity Beta =

Asset or Unlevered Beta [ 1+ (1-t) d/e]
Q2: Equity or Levered Beta of RTC
= 0.725 [ 1+ (1-0.40) (0.37/0.63) ]

= 0.725 [ 1+ (0.60) (0.587) ]

= 0.725 [ 1.3522]

= 0.98
Q2 : Cost of Equity for RTC
• Using CAPM
COE = Rf + Beta (MRP)
Rf = yield on 30 year Govt T-Bond = 4.10%
Beta = 0.98
MRP= 6%

COE = 4.10 + (0.98* 6%)

= 9.98%
 Q3 : Weighted Average Cost of Capital
(WACC) of RTC
• WACC = After tax COD ( D/V) + COE (E/V)
• After tax COD = 7.96 * (1-0.40) = 4.78%
• D/V (market value weight – Exhibit 6) = 0.37
• COE= 9.98%
• E/V = (1- D/V)= 0.63
• WACC = 4.78 (0.37) + 9.98(0.63)
= 6.29+1.77
= 8.06%
 Assignment 1
1. Sensitivity analysis for Lady M case (Q.NO 6 of the case) & % stake
to be given to the Chinese investor ( Q.no.7)
2. What is the EV & Value per share of RTC if
RTC has WC as that of the best firm in the
industry ???
3. What is the EV and Equity value per share of RTC?
4. What is the equity value for Robertson based on [a] EBIAT
multiple and [b] P/E ratio of comparable firms