ALFA COLLER Case Solution
Synopsis
The case deals with the acquisition of the Collar Company by the Alfa. The leading organization Alfa dealing the synthetic products was founded in the year 1960. The product is vitally used by the large organization as a raw material for their production process. The company has the strong competitive position by providing the quality products in the market. The company is highly recognized by meeting the demands of the customers well in time and have the strong future vision for growth.
As far as its competitive position is concerned, the company is not burdened by this factor because of the strong barrier to enter in such industry due to the huge investment. With the help of the continuous research by investing in the research and development cost, the company innovate its products which also help in making a clear distinction of the product with the low quality and low cost substitutes present in the market.
The Alfa Company still lacks its presence in some of the emerging countries like Brazil, China and India. The competitors by focusing on this aspect are considering the acquisitions in such countries to open up their window in those countries to meet the highly growing demands. This was the prime issue which was dealt in detail in this case. The Alfa Company got the opportunity to acquire the Collar Company who has already made their footprints in the required countries where the Alfa Company wants to move.
Collar Company through its strong operations has created a good market share in the industry is the medium sized company had the required innovative technology. The only requirement in this case is to do the valuation of the company through the use of the different valuation techniques like the discounting cash flow method and the valuation of the company using the values of the comparable companies.
From the Buyer’s Perspective
The valuation of the Collar Company is done by using the Discounting Cash Flow Method as well as through the use of comparable companies. In order to value the company from the buyer’s perspective, the company is required to come up with the value of the operating cash flow which can be calculated using the following formula:
(Sales – (Variable cost + Fixed Cost) – Depreciation)*(1-taxes) + Depreciation
In order to check the potential of the company, some forecasting is required for the future possible earnings of the Alfa Company by acquiring the Collar Company. This can be done using the annual growth rate of 3% to be used for the forecasting to about 2013. Then in order to come up with the valuation of the company those operating cash flows are required to be discounted back to its present value using the appropriate discount rate.
The discount rate or the weighted average cost of capital for the company is calculated using the:
WACC = Wd*Rd*(1-Taxes) +We*RSU
Where,
Wd= weight of debt
Rd= rate of debt
We= weight of equity
Rsu= required rate of equity (unlevered)
It can be seen that all the components of WACC are present except the value for “RSU”, which can be determined through following formula which is,
RSU = Wd*Rd + We*RSL
Where,
Wd= weight of debt
Rd= rate of debt
We= weight of equity
RSL= required rate of equity (levered)
Lastly in order to get the value of “RSL” through the CAPM formula, which is
RSL = Rf + B(Rm – Rf)
Where,
Rf= risk free rate
B= beta coefficient
Rm= market rate
In the final stage the calculated operating cash flows are divided by the WACC and the value of the firm is calculated...............
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