Unformatted text preview: n to Value Delphi
Based on their previous experience with their own autosuppliers, Mr. Lufkin believes that Chrysler’s management can rationalize Delphi’s production line, which would result in a reduction of operating costs to about 50% of sales.
Mr. Lufkin also estimates that Delphi’s EBIT will grow at a constant rate of 2% per year starting in year 5, while depreciation will be negligible from that year on. Additions to net working capital (excluding cash) will be $500 and capital expenditures will be $1000 for each of the following four years (years 1 to 4), and negligible afterwards. Delphi, as well as other autopart suppliers in the industry, faces a tax rate of 34%. 4 Other Information to Value Delphi
Delphi is not a traded company, so no market value of equity or cost of equity is available. However, there are two other major autoparts suppliers that are publicly traded and are similar to Delphi in terms of their asset size. One of them has a historical debttoequity ratio of about 1.26 and beta of .6. The other usually maintains a debttoequity ratio of .8 and has a beta of...
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