ALFA COLLER Harvard Case Solution & Analysis


(Please refer to appendices for the


  1. In order to calculate the operating cash flow, there is a need to prepare an hypothesis for the following elements:
    1. Revenue growth rate needs to be determined and according to the information provided in the scenario, it is a fact that the growth would be fix at 2.5% to 3% range and also according to attachment 3, the inflation rate of 2.4% seems to be appropriate for the calculation however; it should be noted that the growth would reduce to 0.5% rate, which is assumed for the terminal value. Overall, the growth needs to be converted to a nominal rate by applying the inflation rate and also it should reduce to 0.5% near the end of 10 years.
    2. The value of production could be estimated on the basis of presuming that it’s equal to revenue minus variation in finished goods and purchases of products for marketing. According to most recent data it has been 90% of revenue.
    3. According to recent data, the value of EBITDA to value of production has been estimated at 14.30% due to which it is assumed to exist in the future period.
    4. As the relationship between the working capital and sales revenue is examined, the recent data suggest that net working capital is 20% of revenue.
    5. The investment in asset would grow in line with nominal inflation rate.
    6. The terminal value would be estimated using perpetual growth that would be adjusted for the inflation rate and hence discount at the cost of capital.

So by subtracting tax paid, investment in net working capital and non-current asset from earnings before interest, tax, depreciation and amortization, we arrive at a figure for un-levered Cash flows.

  1. The present value of synergies would be estimated through the following hypothesis already provided in the scenario:
    1. Sales would grow at 3% starting from 2004 and lasting three years. Eventually it would decrease at progressive rate till 2013.
    2. Due to cost savings in purchases as a result of acquisition there should be increase in EBITDA % of production value from 14.40% to 16.50%.
    3. In line with the increase in sales growth the working capital % of revenue should increase from 20% to 21.20%.
    4. The investment in non-current assets would remain unchanged.
    5. The terminal value would be estimated using the same method as above.
    6. In order to estimate the cost of capital we need to determine the following from attachment 4:
      1. Risk free rate stood at 4.58%.
      2. Risk Premium at 4.75%.
      3. The mean value for beta taken from different companies is determined at 0.495.
      4. 4.45% is the cost of debt.
      5. The proportion in which the organization needs to be financed by ratio of 25% to 75% for debt and equity.
      6. The IR PEG Tax rate is 36% as of September 2002.................

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Alfa Coller Case Solution

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