Group12_Burton Case.pptx - Group 12 BURTON SENSOR SHOULD...

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BURTON SENSOR Group 12
SHOULD MARSHALL CONTINUE TO PURSUE HER HIGH GROWTH STRATEGY? HOW CAN SHE FINANCE IT? WHAT IS THE POTENTIAL EFFECT OF GROWTH ON BURTON'S STOCK PRICE? Yes. Finances: Raising debt looks difficult – terms and conditions by bank 1) Outstanding bank loans not to exceed 75% of AR and inventory 2) Liabilities to not be over 3 times book value of equity Issue equity for all expansion plans as Marshall is already planning Thermowell Machines: Stock prices will not be affected Raising equity capital: Stock prices would go down in the short run EE acquisition: Stock prices might decrease in the short run and will depend on performance of combined entity in the long run
SHOULD SHE PURCHASE THE THERMOWELL MACHINES? Yes, the NPV of the deal is positive. Year end - 1 2 3 4 5 6 7 2,017 2,018 2,019 2,020 2,021 2,022 2,023 Operators -1,70,000 -1,70,000 -1,70,000 -1,70,000 -1,70,000 -1,70,000 -1,70,000 Material and Warehouse -7,80,000 -7,80,000 -7,80,000 -7,80,000 -7,80,000 -7,80,000 -7,80,000 Tax savings on expenditure 3,32,500 3,32,500 3,32,500 3,32,500 3,32,500 3,32,500 3,32,500 Savings from Purchase 14,00,000 14,00,000 14,00,000 14,00,000 14,00,000 14,00,000 14,00,000 Tax Savings lost on Purchase -4,90,000 -4,90,000 -4,90,000 -4,90,000 -4,90,000 -4,90,000 -4,90,000 Depreciation Tax Shield 30,000 30,000 30,000 30,000 30,000 30,000 30,000 Change in NWC -6,50,000 - - - - - 6,50,000 Capex -6,00,000 - - - - - - Incremental CF -12,50,000 3,22,500 3,22,500 3,22,500 3,22,500 3,22,500 3,22,500 9,72,500 DF 1.00 0.93 0.86 0.79 0.73 0.68 0.63 0.58 FCF -12,50,000 2,98,451 2,76,195 2,55,599 2,36,538 2,18,900 2,02,576 5,65,315
CALCULATION OF WACC We need unlevered Beta from peers to compute the Levered Beta for Burton WACC Calculation Peers Average Equity Beta Average Debt/Equity Unlevered Beta TE Connectivity (TEL) 1.24 0.13 1.14 Risk Free Rate 3% Ametek (AME) 1.25 0.11 1.16 ERP 5.80%

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