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INTERCO_memo_521_2011

INTERCO_memo_521_2011 - INTERCO Case Study Memo(due start...

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INTERCO Case Study Memo (due start of class 9/27/2011) 1. What was Interco like in August 1988 (products produced, size, etc.)? 2. What are Interco’s goals in August 1988 and how does it plan to achieve them? What actions had Interco already taken prior to August 1988? 3. Assume the forecasted cash flows over the next ten years for Interco (given to you on the next page) are correct. Also assume that the terminal value of Interco at the end of year ten is estimated to be 14 times its year ten cash flow of $339 million (the 14 was obtained based on stock price multiples of competitors). a. What is the fair price per share of Interco stock assuming a discount rate of 10% is used based on these forecasts? What if the discount rate is 14%? b. What fraction of Interco’s estimated total firm value represents the terminal value of Interco, and what fraction of the total firm value represents the present value of the expected cash flows over the next ten years. Do this calculation assuming a discount rate of 10% and then assuming a discount rate of 14%.
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