Corporate Finance

Juan Carlos Ganme

Gerardo Fumagal
Osvaldo Gallegos
Cases: Marriott A and Flinder Valves

Case Marriott A
Questions to solve:
1. Why is Marriotts CFO proposing the Project Chariot?
To improve the financial performance of the firm, by re-structuring the company in two
separating activities to distinguish those that require a large fixed assets (Real estates
ownership) and those with relative low amount of assets (Management services and
others).
By dividing in this way, the large amount of debt will go with the real estates ownership
called Host Marriott Corp. (HMC), whereas the rest of activities will go to Marriott
International (MII). Doing so, the value of the 2 firms combined will exceed this years
book value, according to expectations (see appendix 1).
2. Is the proposed restructuring consistent with managements responsibilities?
It is, as it clearly separate the activities and focus on management services rather than
owning the hotels. Furthermore, it improves the cash flows from the existing structure
(see appendix 1), this improvement will allow HMC to meet its debt responsibilities ( a
total cash flow projected of $771 million in 1992 versus $478 million in 1991.
The DCF in HMC assuming a worst case scenario will exceed current value of the firms
assets $5,218 million versus $4,600 million, which indicates that the firm will improve as
its assets will appreciate.
3. The case describes two conceptions of managers fiduciary duty (page 9).
Which do you favor: the shareholder conception or the corporate
conception? Does your stance make a difference in this case?
We agree upon favoring the shareholder conception, as this provides an improvement on
cash flows, as this condition is met, other financial gaps can be covered, plus it revalues
the total firm based upon the expected cash flows.
In this particular case, by having this improvement on cash flow, debt responsibilities can
be covered inside HMC or by using the line of credit guaranteed by MII.
On regards of the bondholders, the option is to increase the return as bonds will reduce
the grade to junk bonds, for the calculation on DCF we assume a return of 10.81
assuming the highest risk for bonds. This action will compensate bondholders for the
action.
4. Should Mr. Marriott recommend the proposed restructuring to the board?

Yes, as it increase the value of the combined firms, focus activities per company and
provides better cash flows.

Appendix 1.
Marriott A
1989

1990

1991

Forecast
1992

Notes

MC
Long-term debt
Total shareholder's equity

D
E

Book Value
Sales
Growth
Share Price
EPS
Dividends
Ke
Kd
WACC

7,536
14%
33.38
1.62
0.25

3598
407

2979
679

4005

3658

7,646
1%
10.50
0.46
0.28

8,331
9%
16.50
0.80
0.28
10.70%
9.30%
8.01%

Using the dividend formula

(DIV/Po)+g

HMC
Long-term debt
D
Total shareholder's equity
E
Sales
Operating cash flow before corporate expenses, interest
expenses and taxes
Total Assests
Ke
Kd
WACC
DCF

Book Value

2,000
600
1,800
363
4,600
10.70%
10.81%
7.96%
5,218

2600

MIC
Long-term debt
D
Total shareholder's equity
E
Sales
Operating cash flow before corporate expenses, interest
expenses and taxes

400
800
7900
408

Book Value

1200

Combined Value

3800

Assuming the worst case

scenario growth as in 1990

Case Flinder Valves and Controls

Questions to solve:
5. How do you see FVCs situation? What are the strengths and weaknesses of
FVC and RSE? Why should the two companies want to negotiate?
FVC is about to embark in a project with high risk, that involves a technology not yet
probed to be deployed. Its financial structure is based on pure equity to finance its
operations. The ratio analysis shown that the margins of FVC are quite lower in
comparison with those from RSE, 74 % in average fro FVC and 28 % in average for
RSE. This represents and advantage for FVC in case of the merger, as more cash can fund
their projects especially in the case of high risk is associated.
FVC has appreciate on its stock value on the last 3 year growing from 22.25 to 39.75
increasing the equity of the company, this is an advantage for RSE to make the merger,
RSE has sustained its stock value on the last years, so the opportunity to buy FVC is to
improve its stock value.
RSE has a capital structure balanced between debt and equity, more flexible that FVC a
14 % debt from capital is presented in 2007. RSE WACC is on 24.4 % and tends to lower
as prediction on stock price will improve the value lowering the cost of equity since
dividend will remain.
The companies should merge, as benefits to promote project are clear, their numbers will
improve WACC is lower and cash will increase to fund the high risk projects.
6. What is FVC worth? What are the key value drivers?
FVC value according to DFC method worth 75 million, although, by using the industrys
average the value seems to be higher more than 103 million which is closer to the market
capitalization given in the case. The difference can be explain by the capital structure of
the firm as it does not have debt the WACC is higher so is the discount rate, with more
debt the discount is lower the value will increase.
FVC is a firm based on high skilled engineers that develop contractual work for
machinery industry; FVC strives for innovation and technology. We do not know about
the cycle of product development on this industry but that has to be a driver in order to
decide the capital structure

Appendix 2.
FVC

2007
DCF Value
WACC

2008

$1,580

Residual value of assets

DCF value of
=NPV(WACC,CFAi)+residual
assets
value of assets

$75,004
Value of
Assets

By comparables:
Price-earnings ratio

Average of Industry

Estimated value

=EAT*PE ratio

18.55
$103,416

FVC
Ratios
ROE

=EAT/Equity

15%

=EAT/Equity

17%

RSM
ROE
Debt %

14%

14%

Ke

18.9%

7.2%

Kd

7.76%

6.98%

24.24%

9.59%

WACC

2010

$5,310

$5,784

2011

2012

3.3%
=EBIT*(1-Tc)+Depreciation
exp - WCR - Net capital exp

CFA

2009

$6,428
$
51,414

$7,249