Hbs Pinkerton

Topics: Generally Accepted Accounting Principles, Balance sheet, Asset Pages: 12 (1989 words) Published: June 21, 2013
Exhibit 1

Selected Pinkerton's Financial Data (in $millions) 1983 1984 1985 1986 1987 (E)

Income From Services Cost of Services provided Gross Profit Operating Expenses Operating Profit Cash Accounts receivable, net Other current assets Total Current Assets Net property, plant, and equipment Total Assets Accounts payable Accrued expenses ad other current Liabilities Total Current Liabilities Exhibit 2

$

296
265 32 16 16 4 49 53 11 64 0 29

$

308
275 32 17 15 3 51 54 11 65 1 29

$

312
286 26 25 1 2 55 1 58 13 71 2 26

$

368
343 25 25 1 63 1 63 15 79 5 23

$

408
382 27 27 (0) 1 67 1 69 18 87 3 27

-

-

30

30

28

27

31

Selected CPP Financial Data (in $Millions)
12/31/86 12/31/87 (E)

Income from services Cost of services provided Gross Profit Operation expenses Operating Profit Interest expenses, net Amortization of goodwill Income before Tax Taxes Net Income Cash Accounts receivable, net Other current assets Total Current Assets Notes receivable Goodwill Net property, plant, and equipment Total Assets Notes payable current portion of Long-term debt Accounts payable Accrued expenses and other current Liabilities Total Current Liabilities

$243.6 221.9 21.7 16.1 5.6 0.7 0.3 4.6 2.4 $2.2 $1.0 33.8 8.3 $43.1 $2.4 1.8 1.8 49.1 $1.0 1.0 2.7 26.5 31.2

$251.5 229.4 22.1 14.5 7.6 0.4 0.3 6.9 2.9 $4.0 $1.2 34.0 13.4 $48.6 $2.4 1.5 2.6 55.1 $1.6 1.1 2.1 30.4 35.2

Long term debt, less current portion Shareholder's equity Total Liabilities ahd Equities Return on invested capital Exhibit 3 Net Income: Plus amortization of goodwill Less change in net property, plant, and equipmen Less change in the net working capital Less amortization of Long-term debt Total Cash Flow *Under the assumption CPP does not acquire Pinkerton's.

$3.1 14.7 $49.0

$2.0 18.0 $55.2

21%

25%

Five-year Forecast of CPP Income and Cash flow (in $ millions)* 1988 $4.1 0.3 0.1 1.2 1.1 2.0 1989 $4.3 0.3 0.1 0.7 1.0 2.8 1990 $4.6 0.3 0.1 0.7 1.0 3.1 1991 $4.8 0.3 0.1 0.7 0.0 4.3 1992 $5.0 0.3 0.1 0.8 0.0 4.4

A. All-equity Cost of Capital Based on Wackenhut's Numbers. Wackenhut Value of equity $ 70.2 Value of debt $ 10.6 Assumed tax rate 34% Asset beta 0.81 Historical risk premium 7% All-equity cost of capital, KA 14.2% B. Projected Pinkerton Free Cash Flows Through 1992 Assumptions Revenue (percent of 1987) Gross margin percentage Operating expenses as percent of sales Net working capital as percent of sales Net property plant & equipment as percent sales Free cash flow Revenue Gross margin Operating expenses EBIT Tax at 34% EBIT(1-T) Net working capital Change in net working capital Net pp&e Change in net pp&e Free cash flow 1987 1988

$18 price x 3.9 million shares Book value of debt, Ex 4 Equity beta/[1+(1-T)D/E} Any number of 5% to 8% is defensib Risk-free government rate + asset b 1989 1990 1991

100.00%

90.00% 8.50% 6.00% 8.60% 4.00% 367.5 31.2 22.0 9.2 3.1 6.1 31.6 (7.2) 14.7 (2.9) 16.2

80.00% 9.00% 5.90% 7.40% 4.00% 326.6 29.4 19.3 10.1 3.4 6.7 24.2 (7.4) 13.1 (1.6) 15.7

70.00% 9.50% 5.80% 6.20% 4.00% 285.8 27.2 16.6 10.6 3.6 7.0 17.7 (6.5) 11.4 (1.6) 15.1

73.50% 10.25% 5.80% 6.20% 4.00% 300.1 30.8 17.4 13.4 4.5 8.8 18.6 0.9 12.0 0.6 7.4

408.3

38.8 17.6

PV Free cash flow at All-Equity Cost of Capital C. Estimated Continuing Value Perpetual growth rate (g) Perpetual spread (r-k) PV of terminal value Estimated base case continuing value at time 0 D. Value of Incremental Improvements to CCP Improved gross margin Increase in taxes at 34% tax rate Increased income after tax = increased FCF Present value of increased FCFs discounted at KA Terminal value at g=3% and r=KA+2% Present value of terminal value Value of incremental improvements

$

44.6

0% 0% 33.4
$ 36.0

2% 1% 34.4

2% 2% 34.7

4% 1% 35.6

$3.1 $14.8 $7.6
$10.7 1987 1988

1.2 0.4 0.8

1.5 0.5 1.0

2.0 0.7 1.3

E. Value of incremental tax shields Assuming Target Interest...
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