Bw/Ip International, Inc Case

Valuation of Accumulated Accounts BUFN 750 BW/IP International, Inc 1? BW/IP is a acceptable applicant for the advantage buyout. Steady banknote breeze (around 30 actor per year). Strong administration team. Positive NPV (about 61. 5 million) The NPV of BW/IP is 61. 5million(301-239. 5). Thus, we are absolutely optimistic about this BW/IP’s project. Artful the NPV. Method: APV: VL=VU+PV (ITS). We can get the absorption paid agenda from the BW/IP’s projected operating performance, which agency there is a pre-determined absorption paid to debt holders. Assumption: Tax rate: 38%. From 1991 to 1993, the tax bulk charcoal to be constant, which is 38%. And we accept that the tax bulk will abide to be 38%. Exhibit 1 shows the action of artful tax rate: Advance rate:We accept the activity will aftermost for infinity, and abound in perpetuity afterwards year 1992. And we use the boilerplate annually advance bulk from 1990 to 1993 as our perpetuity advance rate, which is 2. 3%. Change in NWC:We decrease banknote from NWC provided in the case and we get the adapted change in NWC. The adding is presented in Exhibit 2. Abatement rate:Typically, the advance border of a accepted advantage buyout ambit from 5 to 10 years, so we use the ten years treasury yields, catastrophe at 1987 as the accident chargeless rate, which is 8. 79%. For the bazaar return, we use the S&P 500 basis in 1980s, which is 12. 79%. Thus, we can calmly get the accident premium. Exhibit 3 shows the action of artful abatement rate. Tax shields:Giving the absorption paid schedule, we can bulk out the tax absorber anniversary year from 1988 to 1993 at the tax bulk of 38%. Discount rate: with a pre-determined debt and absorption paid, we should use the bulk of debt to get the present bulk of absorption tax shield, because the accident of tax absorber is affective calm with the accident of the accommodation (debt), instead of the absolute assets. We accept the accumulated borrowing bulk is the aforementioned with BBB abiding bond, which is the bulk of debt, 10. 63%. Thus the present bulk of tax absorber from 1988 to 1993 is 31. 91. We accept abiding debt from the year 1994, and the aforementioned advance rate, which is 2. 3%. Exhibit 4 shows the processing of artful tax shields. The FCF is presented in Exhibit 5. Sensitivity Assay for BW/IP is presented in Exhibit 6 2? We favor the proposed accretion of UCP. The primary sources of bulk in the transaction include: Low basic or banknote claim UCP is a baby firm, which would crave added borrowing by BW/IP of alone 13 million. Synergy and able gains. UCP’s artefact band complemented BW/IP’s acutely able-bodied because UCP’s best adorable affection was its installed abject in the petroleum industry and calm they would accept the bigger installed abject in the petroleum segment. Improved administration Takeover can advance administration because absorption and arch payments can force administration to advance achievement and operating efficiency. The proposed bulk is reasonable, because it is college than the levered bulk of the project, which is 48. 17. Method: APV: VL=VU+PV (ITS). Assumption: Tax rate: Tax rate=38%, which is the aforementioned as the tax bulk for BWIP. Advance rate: We use the boilerplate annually advance bulk from 1991 to 1993 as ourgrowth rate,which is 6%. Discount rate: We use the ten years treasury yields, catastrophe at 1988 as the accident chargeless rate, which is 9. 4%. Exhibit 7 shows the adding of Vu Exhibit 8 shows the adding of PV(ITS) Sensitivity Assay for UCP/IP is presented in Exhibit 6 3. How do the assorted appearance of the BW/IP buyout affect the company’sdecisions about long-horizon opportunities such as the UCP acquisition? What are the advantages and disadvantages of the 1987 buyout, beheld as afinancial program? Afterwards the buyout, BW/IP became a abreast endemic aggregation which was beneath abased from Borg-Warner Corporation than afore in accommodation making. For the opportunities that the managers favored, such as the UCP acquisition, the aggregation had added adventitious to backpack on the deal. However, for the case in which beyond bulk of costs is required, the aggregation may not be aggressive abundant afterwards Borg-Warner’s banking support. The buyout could generateda bigger and a added able management, by alteration the accumulated anatomy (including modifying and replacing controlling and administration staff, accidental aggregation sectors, and boundless expenditures), BW/IP can abate itself and acquire abundant returns. However, aback the 1987 buyout is awful leveraged, the new aggregation has a aerial debt-to-equity ratio, which agency the aggregation needs to accomplish appropriate acknowledgment to pay the bulk of debt or faced the adventitious of bankruptcy. Besides, the leveraged buyout is additionally advised to be a chancy project, which may be calmly afflicted by economics environment. The adventitious of success tends to be beyond beneath steadily growing economy, while abate in recession periods. 4. As one of BW/IP’s bankers, would you accept the company’s appeal for a abandonment of covenants and costs of the UCP acquisition? Yes. A broker will not accept to accounts a activity unless he has aplomb in the advantage of the activity and in that he can get his money back. The projected NPV of the UPC accord is 48. 17 actor dollars, which is far bigger than the action 18. 5 actor dollars. To assay this qualitatively, the accepted success of the UCP accretion comes from several aspects. Undeniably, the bread-and-butter and automated anticipation is adjoin costs a chancy activity . However, the accord will accomplish absolute synergies aback UCP’s artefact band complemented BW/IP’s acutely well. BW/IP will accession its adequacy in both aboriginal accessories and aftermarket area domestically as able-bodied as internationally afterwards accepting UPC. Besides, as mentioned in the case, the acceptable believability of Mr. Valli and his aggregation and that C&D’s principals were accomplished and admired in the banking association will affect bankers’ attitude. Exhibit 1: Tax rate 1987 1988 1989 1990 1991 1992 1993 EBT  -9. 56  -0. 001  8. 91  12. 95  17. 31  19. 49  23. 57 Income tax  2. 8 0 0  3. 61  6. 58  7. 41  8. 96 Tax rate -29% 0% 0% 28% 38% 38% 38% Exhibit 2: Change in NWC AR  58. 68  53. 1  51. 69  55. 08  59. 11  63. 6  67. 91  72. 54 INV  58. 5  58. 39  60. 72  64. 66  69. 57  75. 46  80. 29  85. 53 Other accepted asset  3. 91  3. 49  4. 42  4. 7  4. 99  5. 31  5. 64  5. 99 AP  15. 78  18. 12  19. 73  20. 94  22. 32  23. 78  25. 19  26. 69 Other accepted liabilities  14. 92  17. 29  15. 19  16. 12  17. 1  18. 23  19. 36  20. 56 NWC  90. 39  79. 57  81. 91  87. 38  94. 25  102. 32  109. 29  116. 81 Change in NWC  -10. 82  2. 34  5. 47  6. 87  8. 07  6. 97  7. 52  Exhibit 3: Bulk of capital Cost of basic - 17. 5% CAPM  Rf - 8. 79% Exhibit 7 Hint  Bazaar retur - 12. 79% S&P 500 basis in 1980s  Accident exceptional - 4. 00% Exhibit 4: Interest tax shield 1988 1989 1990 1991 1992 1993 Total absorption paid  0. 63  1. 75  1. 66  1. 51  1. 4  1. 22 ITS: tax [email protected]%  0. 24  0. 67  0. 63  0. 57  0. 53  0. 46 Cost of debt 10. 63% PV (ITS) 1988-1993  31. 91 PV (Terminal value)  37. 1 Total PV (ITS)  69. 00 Exhibit 5: Free banknote flow 1986 1987 1988 1989 1990 1991 1992 1993 FCF  39. 37  26. 8  24. 62  24. 11  24. 57  24. 72  25. 8 Growth rate  2. 3% Terminal Value 270 VU  232. 89  PV (ITS) 69 VL  301. 89 Exhibit 6: Sensitivity assay for BW/IP change of NPV Growth rate   0. 00%   32.    -47. 91%   2. 30%   62. 39   0. 00%   4. 60%   109. 5   75. 51% Discount rate   10. 79%   81. 5   32. 52%   12. 79%   61. 5   0. 00%   14. 79%   44. 5   -27. 64% Cost of debt   9. 63%   64. 5   4. 88%   10. 63%   61. 5   0. 00%   11. 63%   59. 5   -3. 25% Exhibit 7: The adding of Vu 1988 1989 1990 1991 1992 1993 EBIT  -1. 15  2. 59  3. 29  3. 96  4. 34  4. 74 Income tax @  -0. 44  0. 98  1. 25  1. 50  1. 65  1. 80 NI  -0. 71  1. 61  2. 04  2. 46  2. 69  2. 94 Depreciation  0. 48  0. 6  0. 99  0. 90  0. 84  0. 84 Change in AR  1. 13  -0. 15  -0. 22  -0. 20  -0. 13  -0. 14 Change in inventory  -0. 36  0. 68  -0. 21  -0. 18  -0. 12  -0. 13 Change in alternative asset  1. 73  0. 00  0. 00  0. 00  0. 00  0. 00 Change in accepted liability  0. 27  0. 18  -0. 01  -0. 35  -0. 04  -0. 04 Change in NWC  2. 23  0. 35  -0. 42  -0. 03  -0. 21  -0. 23 Capital expenditure  0. 18  1. 20  0. 40  0. 40  0. 40  0. 40 FCF  -2. 64  1. 02  3. 05  2. 99  3. 34  3. 61 Growth rate -2% 12% 8% Average advance rate 6% Terminal value  53. 15 FCF  -2. 64  1. 02  3. 05  2. 99  56. 9 VU  40. 28 Exhibit 8: The adding of PV(ITS) 1988 1989 1990 1991 1992 1993 Interest  0. 63  1. 75  1. 66  1. 51  1. 40  1. 22 ITS: tax [email protected]%  0. 24  0. 67  0. 63  0. 57  0. 53  0. 46 Terminal value  2. 18  10. 01 PV (ITS)  7. 97 Exhibit 9: Sensitivity assay for UCP/IP UCP  NPV  % Change of NPV Growth rate: 0. 00%  14. 35  -51. 76%  6. 00%  29. 75  0. 00%  12. 00%  278. 5  836. 13% Discount rate:  10. 79%  46. 5  57. 63%  12. 79%  29. 5  0. 00%  14. 79%  20. 21  -31. 49% cost of debt:  9. 63%  30. 5  3. 39%  10. 63%  29. 5  0. 00%  11. 63%  27. 5  -6. 78%

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