Lecture6 - GM apv question

Lufkinbelievesthatchryslersmanagementcanrationalizedel

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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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