It is the end of 2013, and KOC Inc. has just received a buyout offer from a priv
ID: 2729438 • Letter: I
Question
It is the end of 2013, and KOC Inc. has just received a buyout offer from a private equity firm. Upon receiving the offer, KOC’s board set up a special committee to evaluate the offer and to make recommendations about the transaction.
The special committee would like you to estimate the value of KOC based on management forecasts given below. Due to the nature of the transaction, you realize that the Capital Cash Flow (CCF) valuation is the most appropriate method. The valuations are to be done as of the end of 2013. KOC is subject to 37.5% tax rate.
KOC is currently debt free, but the transaction will be financed with term loans of $8.9 billion at an interest rate of 7% and bank debt of $12 billion at an interest rate of 8%. The firm pays interest during the year on its beginning-of-the-year debt balances. The outstanding debt amounts over the next five years are given below. Beyond 2018, you expect that KOC’s outstanding debt will grow with firm value.
Outstanding Debt:
Outstanding debt amounts at the end of
2013
2014
2015
2016
2017
2018
Term Loan
8,900
7,900
6,900
5,900
4,900
3,900
Bank Debt
12,000
10,894
8,892
6,517
3,523
29
Management Projections of EBIT, Depreciation, and Capital Expenditures:
Projected Fiscal Year Ending December 31st
2014
2015
2016
2017
2018
EBIT
5,360
6,537
6,927
7,628
8,123
Depreciation
1,446
1,536
1,632
1,734
1,842
Capital Expenditure
1,560
1,634
1,784
1,904
2,015
Management Projections of Net Working Capital:
2013
(Actual)
2014
2015
2016
2017
2018
Net Working Capital
348
489
584
640
659
679
Market and Interest Rate Data:
Risk-free rate = 4%
Market risk premium = 6%
Long-term growth rate = 3%
Interest rate on term loan = 7%
Interest rate on bank debt = 8%
Tax rate = 37.5%
Information about Comparable Companies:
Company
Equity Beta
Debt Beta
Total Debt ($m)
Market value of equity ($m)
RTH Healthcare
1.7
0.2
5,000
3,000
Health Management Associates
0.8
0.1
2,000
6,000
Community Health Systems
0.9
0.1
3,000
5,000
What are the interest tax shields for years 2014 through 2019? Input your answer rounded to the nearest million but without the dollar sign or the commas.
Year
Interest Tax Shields
2014
2015
2016
2017
2018
2019
Outstanding debt amounts at the end of
2013
2014
2015
2016
2017
2018
Term Loan
8,900
7,900
6,900
5,900
4,900
3,900
Bank Debt
12,000
10,894
8,892
6,517
3,523
29
Explanation / Answer
We first need to compute Interest amounts on term loan and bank debt
Interest on term loan = Term loan x interest rate
Year
Amount
Interest rate
Interest
2013
8900
7%
623
2014
7900
7%
553
2015
6900
7%
483
2016
5900
7%
413
2017
4900
7%
343
2018
3900
7%
273
Interest on bank debt = bank debt x interest rate
Year
Amount
Interest rate
Interest
2013
12000
8%
960
2014
10894
8%
871.52
2015
8892
8%
711.36
2016
6517
8%
521.36
2017
3523
8%
281.84
2018
29
8%
2.32
Interest tax shield = total interest x tax rate
Year
Term loan interest
Bank Debt Interest
Total Interest
Tax rate
Total interest x tax rate
2013
623
960
1583
35%
554.05
2014
553
871.52
1424.52
35%
498.58
2015
483
711.36
1194.36
35%
418.03
2016
413
521.36
934.36
35%
327.03
2017
343
281.84
624.84
35%
218.69
2018
273
2.32
275.32
35%
96.36
2112.74
Year
Amount
Interest rate
Interest
2013
8900
7%
623
2014
7900
7%
553
2015
6900
7%
483
2016
5900
7%
413
2017
4900
7%
343
2018
3900
7%
273
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