Smith School of Business
Question Sheet: Congoleum Corporation
Prof. Dalida Kadyrzhanova
In this case, you have to evaluate the LBO proposal and decide whether the $38 per share o¤er price is appropriate. You will combine the valuation principles and methods discussed in the course to evaluate a complex transaction from the perspectives of the various participants. Your write-up should address and defend the assumptions that underlie the inputs to your analysis before you proceed to present your results. The following questions should be addressed in your report, and will serve to organize your discussion:
1. What characteristics of Congoleum make it a likely candidate for a leveraged buyout? 2. How would you go about estimating the borrowing cost in the LBO years and the borrowing cost in the post-1984 period? In particular, it would probably not be legitimate to use the coupon rates on the new LBO debts as rD in the LBO years. Why? For the post-1984 period, should we expect the bond rating to improve (and rD to decrease)? Why or why not? 3. Based on your analysis, what do you think of the $38 per share o¤er? Your valuation analysis should make up the bulk of your report and serve to answer this question. More speci…cally: Which is the best valuation approach to deal with the changing debt ratios in 1980-1984? Which valuation method would you use to value the post-1984 cash ‡ ows?
How would you estimate Congoleum’ long-term (post-1984) debt ratio? s
Based on your understanding of the case facts, what growth rate would you use? How sensitive is your result to the choice of growth rate?
4. Why would institutional investors be willing to …nance a leveraged buyout with the capital structure proposed? What are the roles of the “equity kicker” and “strip …nancing” ?
5. Where will the value for the acquisition premium of 50% come from in the proposed buyout? What portions of the purchase premium are...