The assignment is twofold. First, to advise Tom Wathen as to whether he should buy Pinkerton for the asking price of $100 million. Second, regardless of your answer to #1, assuming that Wathen does buy Pinkerton, should he finance the purchase with Financing Alternative #1 (debt and equity financing from an investment firm) or Alternative #2 (all debt financing from a bank). The financing alternatives are discussed on page 4 of the case.

You should do the discounted cash flow valuation of the deal using Adjusted Present Value. The question is “What is Pinkerton worth to CPP (Wathen’s sole proprietorship)?” The value of Pinkerton to CPP is made up of three parts:

1.the value of Pinkerton as a stand-alone firm (but including improvements brought to Pinkerton by new management) plus 2.the value of synergies brought to the old CPP due to now having the combined firm plus 3.the value associated with net “financing-side” benefits associated with buying Pinkerton.

Towards calculating #1, page 3 of the case gives information necessary to build a forecast of operating free cash flows associated with Pinkerton as run with Wathen’s new strategy. There are some value drivers for which an expected scenario is given and a pessimistic scenario is given. The purpose of the pessimistic scenario is to judge downside risk. Assume that the expected scenario means “expected value.”

Towards calculating #2, there is also information given on CPP synergies on page 3 of the case.

Common to all the valuations, you have to calculate an unlevered cost of equity. Use the information on one publicly traded peer company, Wackenhut, in Exhibit 4 to estimate the unlevered cost of equity for Pinkerton cash flows. For the continuing value, use the free cash flow growth perpetuity model. Assume a perpetuity growth rate of 5% after 1992.

For financing strategy #2, the most easily quantifiable “financing-side” benefit is the tax shields...

...to Note on Sample CashFlow Template.
Question 1
(5 points) The project with the highest IRR is always the project with the highest NPV.
Your Answer | | Score | Explanation |
True | | | |
False | ✔ | 5.00 | Correct. Try now to sort this out in different contexts, |
Total | | 5.00 / 5.00 | |
Question Explanation
This is all about the fundamental difference between IRR and NPV.
Question 2
(10 points) Ann Arbor is considering offering public bus...

...combination of WACC and APV methods.
As stated above, ACC will use the Leverage buy out (LBO) approach, which means that the debt to equity ratio of AirThread will not be the same from 2008 to 2012, so APV approach would be more suitable to valuate the cashflows between 2008 and 2012.
After 2012, AirThread will de-lever to industry norm and thus, they will have a target leverage ratio; therefore WACC is best to estimate the terminal value.
Finally,...

...Pinkerton case - General
Create NPV
“Be Big”
• Check out case instructions on bspace & begin working with your
group
Historical case – CPP’s bid to acquire Pinkerton security guard
firm in
the late 1980s
Provide executive summary & detailed analysis of value of
acquisition
Email your group’s bid to GSI before 6 p.m. evening before
discussion
Be prepared to discuss the case in class (your answers, your
analysis, etc.)
1
Valuation - Use NPV...

...CONSTRUCTION OF FREECASHFLOWS A PEDAGOGICAL NOTE. PART I
Ignacio Vélez-Pareja ivelez@javeriana.edu.co Department of Management Universidad Javeriana Bogotá, Colombia Working Paper N 5
First version: 5-Nov-99 This version: January 2001
This paper can be downloaded from the
Social Science Research Network Electronic Paper Collection: http://papers.ssrn.com/paper.taf?abstract_id=196588...

...
2. Valuation of AD and expected return: FreeCashFlow Method
To value AD we use the FreeCashFlow Method. To calculate the freecashflow streams in the future, we need to use the financial statements of AD. To look what AD will do in the future, we have to make assumptions. A part of these assumptions can be found in exhibit 18 of the case description.
To...

...FreeCashFlows
Revised by C. Chang. Copyright 1996 by The McGraw-Hill Companies, Inc
OUTLINE
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What is FCF? FCFF? FCFE?
How Do You Calculate FCFF?
FCFF Calculation– the CFO Method
FCFF Calculation– the EBIT Method
Equivalence: FCFF(CFO) vs FCFF(EBIT)
FreeCashFlow to Equity (FCFE)
FreeCashFlow Example
What is...

...Freecashflow
In corporate finance, freecashflow (FCF) is cashflow available for distribution among all the securities holders of an organization. They include equity holders, debt holders, preferred stock holders, convertible security holders, and so on.
G. Bennett Stewart - the "economic model of value holds that share prices are determined by just two things: the...

...points)
* From the statement of AirThread case, we know that American Cable Communication want to raise capital by Leveraged Buyout (LBO) approach. This means ACC will finance money though equity and debt to buy AirThread and pay the debt by the cashflows or assets of AirThread.
* In another word, it’s a highly levered transaction using a fixed WACC discount rate; however the leverage is changing in fact.
* If we want to use WACC method, one...

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