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Interco Case Solution

The value of the equity of the firm (FTE approach) by utilizing the 12% cost of
equity

In order to identify the free cash flows available to equity holders, 12 % discount rate is
used as a cost of equity. For the calculation of the firm value to equity holders, terminal
value is also calculated by using a terminal growth rate of 5% in both upper and lower
scenarios. The value of the firm available to equity holder under high growth limit is
$49.7 while the value per share of the company which will be available to equity holders
under lower growth limit is $22.

The stock prices are showing seasonal trends, and some segments of the company are
not performing well which undervalued the current and projected value of the stocks of
the company.

The value of the firm using the WACC approach and utilize a 10% WACC

In order to identify the value of the company, 10% discount rate is used and free cash
flows which have been calculated for the next ten years being discounted at the rate of
10%. The terminal value is also calculated for this purpose, and 5% terminal growth rate
has been assumed. The value of the company is also calculated by using upper and
lower limit growth rates. By discounting the projected free cash flows at 10% under both
scenarios, the value of the firm is calculated which is $68.5 under upper limit growth
rates and $22.4 at lower limit growth rates.

Justification of a debt value

By taking the difference of firm value to equity value, the value of debt is calculated, and
it is calculated under both upper and lower limit growth rates. The percentage of debt
ratio under upper limit growth rate is 27.4% while the value of debt under lower growth
rate is 7.63%. The value of the debt was 19.3% at the end of the year 1987. Therefore,
the projected value of debt under both scenarios is justifying the value of debt which was
at the end of the year 1987.

Multiples Valuation

In order to identify the value of the company, multiple valuation methods are also used,
and the value of the company is identified under different multiples such as sales
multiples, net assets multiples, operating income multiples, net profit multiples and
operating cash flow multiples. Multiples for the comparable transactions are available, by
taking the averages of each multiple and the values at the end of the year 1988, different
values for the company has been calculated which are justifying the valuation performed
by the Wasserstein, Perella irrespective of the value of the company which has been
calculated under sales multiple and it is $103.
Comparison of the values calculated by the Wasserstein, Perella’ and by using FCF
and Multiple valuation method

The value of the company identified by the Wasserstein, Perella is between $68 to $80+,
while the maximum value which is calculated under FCF model is $68.5 and the multiple
valuation methods is showing the maximum value of $103 which shows that the
valuation performed by the Wasserstein, Perella is also appropriate and it seems that
there is no incentive for the Wasserstein, Perella as rejecting the bid offer is a suitable
option as City Capital undervalued the Interco’s stocks.

 Recommendation concerning the $70 offer

The bid offer of $70 is not a suitable offer as it under-valued the company’s stock and
accepting this offer will result in dilution of the wealth of the shareholders. The company
is performing well, and financial position of the company is also should unless of the
Apparel segment. Hence, there is a significant potential for growth, and recent financials
of the company are also showing the upward trend which shows that in future the stock
of the company will perform better as compared to the historical records. Therefore, it is
recommended that the management of the company should not accept the offer of City
Capital of $70 as it will result in the dilution of the shareholder’s wealth and it could affect
the independence of the company as well…………………..

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