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Lecture6 - GM apv question

Whatisdelphisallequityvalueunderchryslers management

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Unformatted text preview: study of default of debt payments shows that 6% of the firms with rating Aa1 and 7% of firms with ratings A1 default on their interest payments and enter financial distress. Industry spets estimate that a typical firm in the auto industry suffers permanent losses equivalent to about 5% of its total market value during financial distress. Chrysler’s total market value of debt and equity is $10 million 7 Outline of Exercise What is Delphi’s all­equity value under current management? What is Delphi’s all­equity value under Chrysler’s management? What are the financing­side effects of the proposed financing methods? What is Delphi’s APV and should Chrysler buy it from $150,000? What are the sources of value? Are there any other strategic considerations? 8 1. Delphi’s all-equity value under current 1. management management Calculate Delphi’s unlevered cost of equity Calculate unlevered cash flows for early years Calculate cash flows for later years – these will lead to a terminal value estimate Discount cash flows back to year 0 using the unlevered cost of equity Assume that cash flows starting in year 1 will accrue to the buyer 9 Delphi’s Unlevered Cost of Equity Traded supplier...
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