DUKE UNIVERSITY Fuqua School of Business FINANCE 351 - CORPORATE FINANCE Hint Sheet: Congoleum Corporation Prof. Simon Gervais Fall 2011 – Term 2
This case illustrates a leveraged buyout and highlights some of its value-creating aspects. You are invited to combine the valuation principles and methods discussed in the course to evaluate a complex transaction from the perspectives of the various participants. Here are some guidelines for your valuation analysis. • Overview of the Valuation Process. Given the nature of the forecast data, it is useful for valuation purposes to treat the 1980-1984 period diﬀerently from the post-1984 period. In fact, the case writer hinted at the possibility of another reorganization at the end of 1984 in the note to Exhibit 14. Throughout, assume that time 0 is year 1979. • Make sure that you notice the changing debt ratios in 1980-1984. Which is the best valuation approach to deal with this? • Free Cash Flow. As usual, the following (unlevered) free-cash-ﬂow formula should prove useful: EBIT = Operating Income − Corporate Expenses − Depreciation, UFCF = (1 − tc )EBIT + Depreciation − Change in NWC − Capital Expenditures. Note that there is a diﬀerence between UFCF deﬁned above and what are referred to as “free cash ﬂows” in Exhibit 13 (on line 14)? • Discount Rates. As we mentioned when discussing the Marriott case, the choice of discount rates is an important part of any valuation procedure. It is worthwhile to spend some time thinking carefully about these issues. – Congoleum’s equity beta is known (see Exhibit 9). Do you need to rely on comparable companies’ data to obtain Congoleum’s asset beta? – For the borrowing cost in the LBO years and the borrowing cost in the post-1984 period, you may use an average of the yields on corporate bonds of appropriate ratings (Exhibit 10). In particular, in this case, it would probably not be legitimate to use the coupon rates on the new LBO debts as rD in the LBO years. Why? Of course,...
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