Stock and Long Term Trend

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Team 1
Monmouth Case

1. Is Robertson a good candidate for Monmouth (assuming the price is right)? Why? Yes. Robertson Tool Company had been going through a few years of low sales and profit, and, coupled with conservative financial and accounting practices, was far behind the normal growth rate for companies in its industry. Robertson’s 50% control of the market for clamps and vises, along with its good position in the scissors and shears’ $200 million market, let it compliment the diverse holdings of Monmouth. These are attractive attributes of Robertson, but the selling point lies in the distribution network consisting of 2,100 wholesalers and 15,000 retail outlets. The Robertson products are sold in 137 countries worldwide. This avenue to market Monmouth and Robertson products across resources could lead to above average growth and profits.

2. Estimate a WACC for the acquisition.

Invested Capital|  | $37,696,000 |  |  |  |
Debt| | $12,000,000 | | |  |
Equity| | $25,696,000 | | |  |
 | | | | |  |
Current market price| | $44 | | |  |
Shares outstanding| | 584,000| | |  |
 | | | | |  |
Unlevered Beat of Comparables| | 0.725| | |  |
Debt/Capital of Comparables| | 32%| | |  |
Levered Beta| | 0.86| | |  |
Risk free rate| | 4.10%| | |  |
MRP| | 6.0%| | |  |
 | | | | |  |
Cost of equity| | 9.28%| | |  |
 | | | | |  |
Sources of capital| | | Weights| | After-tax cost|
Debt| | | 31.83%| | 3.64%|
Equity| | | 68.17%| | 9.28%|
 | | | | |  |
YTM| 6.070%| Tax Rate| 40%| WACC| 7.5%|

3. Discuss whether you think the forecast prepared by Vincent and Rudd is reasonable. Why? Be specific.

We think the forecast is not reasonable since they forecast was too optimistic and subject of their sales growth.

a) The growth rate estimate in the future they use is approximately 6%. The current growth rate is just 2% that cannot be increased as 2 times as large in a short time, although it might increase due to the sales increase after the merge and acquisition of the Monmouth and Robertson. b) NWC should be as a percentage of sales.

c) Terminal Growth rate shouldn’t be zero but around 2%. d) The estimations of SG&A cost and COGS are reasonable. The merger and acquisition will result the percentage SG&A and COGS of sales respectively gradually decrease by increasing the manufacture efficiency and inventory turnover.

Therefore, we decided to change the growth rate from 6% to 3% in the pro-forma, we will have the value of the firm calculated out from the pro-forma is $50 million instead of $56 million.

4. Prepare a value estimate for Robertson equity using the DCF method and info from steps 2 and 3 above.

 | Actual| Forecasts|
 | 2002| 2003| 2004| 2005| 2006| 2007|
 | | | | | |  |
NOPAT| 1.8| 2.4| 3.1| 3.8| 4.2| 4.4|
Plus: Depreciation| 2.1| 2.3| 2.5| 2.7| 2.9| 2.9|
Less: CAPEX| | -4| -3.5| -3.6| -3.8| -2.9|
Less: Change in NWC| -1.4| -1.5| -1.6| -1.6| 0.0|
Firm Free Cash Flow| -0.7| 0.6| 1.3| 1.7| 4.4|
 | | | | | |  |
 | | | | | | 81.9|
Firm Value (millions)| 85.95| | | | Terminal g| 2%|
Less: Debt| 12| | | | |  |
Equity Value| 73.95| | | | |  |
Shares Outstanding| 584000| | | | |  |
Price per share| 12.66|  |  |  |  |  |

5.Estimate a value for Robertson equity based on the comparables approach.  | Actuant Corp.| Briggs & Stratton| Idex Corp.| Lincoln Electric| Snap On Inc.| Stanley Works| Robertson Tool Co.|  | | | | | | |  |

Collection Period (days)| 55| 77| 47| 61| 96| 77| 53| Inventory % Sales| 12%| 18%| 13%| 17%| 18%| 16%| 33%|  | | | | | | |  |
Operating Margin % Sales| 17%| 13%| 20%| 15%| 10%| 15%| 5%| Return on Capital| 21%...
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