Kennecott Copper

1. (45 points) Calculate the value of Carborundum (on an aggregate and per share basis) using both the Free Cash Flow to Capital (FCFcap) and Free Cash Flow to Equity (FCFeq) methods. Use the following assumptions:
Note: Rf=5.6%; MRP=8.8%, Carborundum’s levered beta (prior to deal)=1.16
FCFeq=Net Income + Non Cash Deductions-Capital Expenditures-Change in Net Working Capital-Debt Repayment+ Debt Issuances + Miscellaneous Extras
Answer:
Value of Kennecott using FCFcap is: $53.8
Value of Kennecott using FCFeq is: $49.91

Steps using FCFcap:
Step 1:
FCF_cap=EBIT(1-t)+depreciation+ amortization -Capex-change of NWC
=NI+Interest(1-t) - Change of Net PPE - Change of NWC

Step 2:
WACC calculation:
WACC=%Equity * Re + %Debt*Rd*(1-t)
Re=Rf+beta*MRP=15.8%
So, WACC= 65%*15.8%+35%*10%*(1-0.5)=12.03%
Step 3:
Multiply FCF with corresponding discount factors (1/(1+WACC)^n)

PV(FCFcap)= 166.12
Step 4:
Terminal value of equity = 116.2*10 – 117.1=1044.9
Terminal Enterprise value = equity value + debt value – cash = 1044.9 + 391 – 0 = 1435.9
Step 5:
Total Enterprise value = PV(10year FCFcap) + PV(TV) = 166.12 + 461.28= 627.4
Equity Value = Total Enterprise value – Debt = 653.73 - 186.2= 441.2
Step 6:
Per share value = equity value/share numbers= 441.2/8.2=53.8

Steps using FCFeq:
Step 1:
FCFeq=NI + Non Cash Deductions-Capital Expenditures-Change in NWC-Debt Repayment+ Debt Issuances

Step 2:
Re=Rf+beta*MRP=15.8%
Step 3:
Multiply FCFeq with corresponding discount factors (1/(1+Re)^n)

PV(FCFeq)= 168.45
Step 4:
Terminal value of equity = 116.2*10-117.1=1044.9
PV(TVeq)=240.82
Step 5:
Total Equity value = PV(FCFeq)+PV(TVeq)= 168.45 + 240.82= 409.27
Step 6:
Per share value = equity value/share numbers= 409.27/8.2=49.91

2. (45 points) Where exactly is Kennecott adding value to Carborundum? Estimate the value additions (synergies) on a per share basis and add them to Carborundum’s pre-deal price of $33 per share. Does the result agree with the DCF valuation in