Refer to the HBS case "Prada: To IPO or Not to IPO" and answer the questions below.
Note: Complete the related textbook chapters (RWJJ Chapters 14, 15 & 19) before attempting this case.
WHAT IS THE PROBLEM SAID TO BE FACING PRADA?
Prada got some financial trouble.
First, Prada failed for several times to IPO due to various reasons like SARS, financial crisis, etc.
Second, because of the long-term debt maturing in one year, Prada needed to raise more than 1 billion euros immediately.
Third, Prada at the same time wanted to expand the Asia market which has the highest growth rate and has great potential.
Therefore, due to these problems, Prada was in desperate demand of a huge amount of money and it is quite urgent. However, due to the failure of several times of IPO, Prada was not quite sure which approach it should take to raise the capital.
LIST THE ALTERNATIVE METHODS PRADA COULD USE TO REFINANCE ITS MATURING DEBT. IN ADDITION TO THE MANY ALTERNATIVES MENTIONED IN THE CASE (START BY LISTING THOSE, GROUPING THEM IN THE TWO BROAD CATEGORIES OF "DEBT" AND "EQUITY"), WHAT OTHER VARIATIONS OF THESE DEBT AND EQUITY CHOICES CAN YOU IDENTIFY (TRY TO GIVE TWO OR THREE OTHERS)?
IPO in HK; HKDR; Strategic partnership
Euro/dollar bond; Dim sum bond; Traditional corporate bond
ADR( American depository receipt); hybrid Eurodollar bond
USING LVMH AND LI & FUNG (LF, OWNER OF TRINITY BRAND) AS BENCHMARKS, PROPOSE A METHOD TO ESTIMATE PRADA'S COST OF EQUITY CAPITAL. HINT: "DIVIDEND DISCOUNT MODEL" (RWJJ PP. 401-402). SEE EXHIBIT 10. ASSUME THAT DIVIDENDS FOR THESE COMPARABLES ARE PROJECTED TO GROW AT 5%.
LVMH: R=Div/P + g = 1.77% + 5% = 6.77%
Li & Fung: R = Div/P + g = 1.89% + 5% = 6.89%
Prada: R= (6.77% + 6.89%)/2 = 6.83%
USING LVMH AND LI & FUNG AS BENCHMARKS, ESTIMATE THE MARKET VALUE OF PRADA'S EQUITY CAPITAL (MARKET CAP, IN EURO) BASED ON THE FOLLOWING RATIOS FOUND IN EXHIBIT 10: