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M&A_ValuationExampleRoundatable

# 1159 value of control value digital digital will

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Unformatted text preview: of Control Value Digital Digital will raise its debt ratio to 20%. The equity beta will increase, but the cost of capital will decrease. of New Beta Cost = 1.25 (Unlevered Beta = 1.07; Debt/Equity Ratio = 0.25) of Equity = 6% + 1.25 (5.5%) = 12.88% New After-tax Cost Cost of Debt = 5.25% of Capital = 12.88% (0.8) + 5.25% (0.2) = 11.35% Digital’s Pre-tax The Operating margin will go up to 4% (from 3%). reinvestment rate remains unchanged. The expected growth rate in the next 5 years is 10%. The After year 5, the beta will drop to 1, and the after-tax cost of debt will decline to 4%, cost of equity will decline to 11.5%, and cost of capital to 10% 4%, Value of Control Value 13046(.04)(1.10)(1-0.36)=367.38 13046(.04)(1.10)(1-0.36)=367.38 Valuing Compaq Valuing Compaq Combined Firm Valuation Combined The The combined firm will have some economies of scale, allowing it to increase its current after-tax operating margin slightly. The dollar savings will be approximately \$ 100 million. dollar Current Operating Margin = (2987+522)/(25484+13046) = 9.11% (522 = 4% * 13046) (522 New The The Operating Margin = (2987+522+100)/(25484+13046) = 9.36% combined firm will also have a slightly higher growth rate of 10.50% over the next 5 years, because of operating synergies. 10.50% Combined Firm Beta Combined Digital’s Unlevered Beta = 1.07; Compaq’s Unlevered Beta=1.17 Digital’s Firm Value = \$4.5 bn ; Compaq’s Firm Value = \$38.6 bn Unlevered Beta = 1.07 * (4.5/43.1) + 1.17 (38.6/43.1) = 1.16 Combined Firm’s Debt/Equity Ratio = 13.64% New Levered Beta = 1.16 (1+(1-0.36)(.1364)) = 1.26 Cost of Capital = 12.93% (.88) + 5% (.12) = 11.98% Value of Combined Firm with Synergy Value (2987+522+100)(1-0.36)(1.105) (2987+522+100)(1-0.36)(1.105) Value of Combined Firm with Synergy = \$45,511 million Value of Digital with Synergy Value Value of Combined Firm with Synergy = \$45,508 m Value of Compaq + Value of Digital = 38,542 + 4532 = \$ 43,075 m Value Total Value of Synergy = \$ 2,433 million Value of Digital (Status Quo) Value \$ 2,110 m 2,110 Value of Control - Digital Value \$ 2,421 m 2,421 Value of Synergy Value \$ 2,433 m Value of Digital with control and synergy \$ 6,964 m Value 6,964 Estimating Offer Prices and Exchange Ratios Ratios There are 146.789 million Digital shares outstanding, and Digital There had \$...
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