Round 1 - Case Study Information Pack

Section 1: Case Study – DCF
Relates to Questions 1-7 30 Marks Available in this Section - Estimated time is 50 minutes
INTRODUCTION Build a 5 year discounted cash flow model to value Abbots Inc. using the information outlined below. Your model will need to contain “3 way” financial statements (Income Statement, Cash Flow and Balance Sheet). Once you have completed your model, answer the 7 questions in the “Questions” section below. CONVENTIONS AND PRESENTATION Prior to finishing the test you will be required to submit your workbook containing your model. In preparing your model you should adhere closely to the ModelOff Style Guide. This applies to all case studies. ANSWER TOGGLES Beware that some questions advise you to ignore your answer and assume certain values going forward to reduce the impact of knock on errors on candidates. When modeling these scenarios, you should insert a toggle so that you can select to use the values provided by the questions rather than your models calculations. HISTORICAL INFORMATION Abbots Inc latest historical year end is 31 December 2011. Assume a valuation date of 1 January 2012. All numbers below are in US$ millions unless stated otherwise. Abbots Inc historical Sales and EBIT were $850.0m and $170.0m respectively for the year 31 December 2011. The following numbers were taken from Abbots Inc balance sheet as at 31 December 2011: Account as at 31st December 2011 Property, Plant & Equipment Receivables Inventory Payables Cash Debt Average # of shares outstanding Number of shares outstanding ASSUMPTIONS Assume the following during the forecast period: Sales growth of 2%; EBIT margin of 20%; Effective tax rate of 30%; capital expenditure % of sales of 6%; depreciation as % of beginning net PP&E of 12%; receivables as % of sales of 10%; inventory as % of sales of 8%; and payables % of sales of 12%; No interest is earned on cash at bank; Debt incurs interest of 6% per annum on the opening balance; Debt principal is not repaid; Debt interest is paid in full on the last day of each calendar year; No dividends are paid. WEIGHTED AVERAGE COST OF CAPITAL Use the following assumptions for your weighted average cost of capital (WACC) calculation: pre-tax cost of debt of 6% based on the target capital structure; marginal tax rate of 35%; 10 year US government bond yield on the valuation date is 2%; equity risk premium is 8%; un-levered beta of 0.80; levered beta of 0.93; and 80% equity and 20% debt in the target capital structure. TERMINAL VALUE Calculate terminal value using a growth perpetuity assuming a 2% long-term growth rate. Assume that all cash flows happen at the year end when doing your analysis. millions $212.5 $85.0 $68.0 $102.0 $100.0 $300.0 350.0 325.0

2. The company's current capital structure includes 4 classes of shareholders: (i) Common Shares. Each class has different rights and payoffs when the Company is sold.0x the original share value No participating preferred rights Conversion ratio of 1x1.Round 1 .50/share Liquidation preference of 1.5x the original share value Shares have participating preferred rights Conversion ratio of 1x1 SERIES B PREFERRED SHARES     1. The conversion ratio determines the number of common shares created from converting 1 preferred share.75/share Liquidation preference of 1.5 COMMON SHARES  3. A "liquidation preference" represents the minimum amount of sale proceeds a preferred shareholder is guaranteed before proceeds can be distributed to common shareholders.Estimated time is 15 minutes DON'T GO CHASING WATERFALLS A 5-year old technology start-up company is being acquired by a large multinational corporation.50/share Liquidation preference of 7. a pro rata distribution (based on ownership %) of the sale proceeds available to common shareholders. Over the past 5 years the company has gone through a few rounds of financings to support the operations. A shareholder with "participating preferred" rights receives in addition to the liquidation preference.5 million shares originally issued at $1.0x the original share value No participating preferred rights Conversion ratio of 1x2 SERIES A PREFERRED SHARES     4 million shares originally issued at $0. Each class of preferred shares has the right to convert to common shares and forego its liquidation preference. 3. NOTES 1. (ii) Series A. SERIES C PREFERRED SHARES     2 million shares originally issued $5. (iii) Series B and (iv) Series C.Case Study Information Pack Section 3: Case Study – Waterfalls Relates to Questions 39-40 10 Marks Available in this Section .5 million shares outstanding .

Round 1 .Estimated time is 25 minutes Use Data in Excel File .Case Study Information Pack Section 4: Case Study – Driving Automatic Relates to Questions 42-48 15 Marks Available in this Section .

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