Landmark Facility Solutions Case Study Analysis Help With Solution
1. Depreciation for Landmark:
There is a discrepancy between the text and the exhibit regarding Landmark depreciation. The text on page 3, paragraph 3 mentions that Landmark depreciation will increase by $300,000 per year. Regrettably, exhibit 3a does not reflect that change accurately. The spreadsheet however does. Please use the depreciation amount in the spreadsheet for the forecasted years.
2. Interest expense for Broadway’s post acquisition forecasts:
The case gives you the information needed to forecast the following; Revenue, Gross profit, operating profit (you have to back into the operating expenses), taxes (based upon operating profit) and NOPAT-Net operating profit after taxes. This then enables you to calculate FCF. This way you do not need to calculate the interest payment per year and back into the tax shield. NOPAT+depreciation-Change in NWC-Capex=FCF.
3. Terminal cash flow and terminal growth rate:
Calculate the 2020 cash flow using the models both with and without the synergy adjustments. You would do that the same way you calculate 2015-2019. You then use the revenue growth rate as the terminal growth rate for each company. So forecast 2015 through 2019 as your individual forecasted years. Forecast 2020 as your terminal cash flow. Then use the revenue growth rates as your terminal growth rate to calculate the terminal value, which is terminal cash flow divided by discount rate minus the terminal growth rate.
4. As we discussed in class
this case makes the assumption that the target leverage for a set of comp companies is the correct approach in finding beta and WACC (however there are other approaches and an argument can be made for these other approaches). With this approach use the same WACC in all of your calculations. Make sure that you use the target leverage ratios when calculating WACC.
5. Levering beta:
use the same capital structure assumption that you used in calculating WACC A couple of additional thoughts regarding why the case uses target market ratios rather than ratios derived from the individual company’s balance sheet to calculate WACC.
1. WACC is intended to be forward looking, more a measure of what will be rather than what has been. The reason is that we are valuing the future value of the company. Thus many use a WACC that represents what the capital structure will be, thereby using a target capital structure. Since the target capital structure is what the company is moving towards the theory is that the target capital structure more accurately reflects the future riskiness of the firm.
2. The capital structure of WACC uses market value rather than book values. When market values are not available (such as the Landmark case) a common method of determining the capital structure when calculating WACC is to use a proxy. Two common proxies are industry averages or comp companies in the same industry. This case provided data on comp companies (there is no data for the industry in the case), thus the WACC calculations in the case use the capital structure of the comp companies to estimate the debt-to-equity ratio.
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The case presents you with the basic problem that many firms are faced with-“Do I acquire another company and if so what should we pay for it and how should we structure the new firm?” This case asks you to consider the following issues:
1. Valuing the acquisition opportunity?
2. What is the right financing for the transaction (what is the right combination of debt and equity?).
3. How do I create the pro forma financial statements (forecasting)?
4. What is the appropriate valuation model(s) and what are the appropriate discount rates?
5. What are the projected cash flows of the opportunity and how are those cash flows used to evaluate the acquisition opportunity?
6. How do the key assumptions affect the valuation of the acquisition and the firm’s ability to service the debt? (use of sensitivity analysis).
7. Consider both the short term and long term financial policies (which include target capital structure and the limitations imposed by debt service) and the interaction between investment and financing decisions.
Your write-up should address the major issues that the case presents. At a minimum, the issues listed below should be addresses by you. There may be other issues presented by the case that you notice, please feel free to address those issues as well. I have uploaded an excel spreadsheet that contains the data in the case’s exhibits (should make things a little easier for you). Use spreadsheet for your pro forma financial statements and the firm valuation models (including any sensitivity analysis you do and discount rate calculation). Market comps are included for three firms and provide valuable insight as to capital structure and appropriate discount rate information.
As with any decision making process you will have to make certain assumptions. Make sure that your assumptions are clearly stated and that it’s obvious what your assumption refers to, how it is being used and how it influenced your output and/or decisions. In other words make the connections and have those connections easy to follow.
Be direct. You are asked to address certain issues and questions. Be sure you answer and address those concerns. If it is easier for you to break down your paper into sections (based upon the issues and concerns that you are addressing) that’s fine just make sure it is easy to follow.
The work must be your own work. If you use any outside sources in your write-up those sources must be cited. Keep in mind that citations in no way detract from your work. If any information is taken directly from an outside source (word for word) it must be in quotations.
To access the case use the link provided in Blackboard. I have uploaded an Excel spreadsheet that contains all of the exhibits. All of your valuation work should be done in Excel.
Issues that your write up should address:
1 Does Broadway benefit from acquiring Landmark? If so how and based upon what? Can the $120 mil bid be justified and if so what justifies or does not justify the bid?
2 If Broadway proceeds with the acquisition which financing alternatives should be chosen, and why? Be sure to discuss how and if Broadway will be capable of servicing its debt after the acquisition?
3 How do the two financing methods affect the value of the acquisition to existing shareholders of Broadway? Be specific?
4 Does Broadway reduce shareholder value if it selects the mix of debt and equity financing alternative? What is the cost of equity dilution?
5 Be sure to include the appropriate pro forma financial statements and appropriate valuation models?
6 Also provide details of how you calculated your cost of capital and how the cost of capital will be impacted by the various financing options?
7 Be sure to value both companies pre and post-acquisition.?
8 What is the value of the acquisition to Broadway under both expected and pessimistic scenarios?
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