Congoleum Corporation (Abridged) Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Congoleum Corporation (Abridged) Case Solution

Roles of Equity Kicker and Strip Financing:

In equity kicker, the lenders of the Boston Company would provide credit at a low rate of interest and in exchange it would most likely received the equity position in the Congoleum Corporation. The company offers with the intent of attracting the potential investors who would not be interested in lending to the company.

The equity stripping would be designed for the purpose of reducing the overall equity in a property. The role of the strip financing is inevitable because it repackage different forms of obligations such as preferred stock, debt and common stock into one security, the idea is to ease the interest conflicts and cost of agency between holders of bond, initial components and stockholders.

Exhibit 1: WACC Calculations

WACC Calculations
Risk free rate	9.50%
Market Risk Premium	8.60%
Beta	1.25
Cost of Equity	20.25%
Cost of Debt	7.50%
Total Debt	135567
Total Equity	187485
Debt Ratio	42%
Equity Ratio	58%
Growth Rate	6%
WACC	14.9%

Exhibit 2: Current Value of Congoleum Corporation

Equity Value	187.485
Total Number of Shares	12.2
Price Per Share	15.368

Exhibit 3: Unlevered Free Cash Flows

	0	1	2	3	4	5
Operating income (Exhibit 15)	105.9	111.5	132.2	158.7	175.9	166.1
Less: corporate expenses	8.6	4.3	5.1	5.9	6.8	7.6
depreciation & amortization	7.5	35.51	36.26	37.07	37.95	21.23
Earnings before interest & taxes	89.8	71.69	90.84	115.73	113.15	137.27
Less: tax (@ 48%)	43.1	34.4	43.6	55.6	54.3	65.9
Profit after taxes	46.7	37.3	47.2	60.2	58.8	71.4
Adjustments:
Add back depreciation + amortization		35.51	36.26	37.07	37.95	21.23
Less capital expenditures		(15)	(16.2)	(17.5)	(18.9)	(20.4)
Less investment in working capital required		(2)	(14)	(23.3)	(11.2)	(12.8)
Unlevered Free Cash Flows		55.79	53.30	56.45	66.69	59.41
Terminal Value						667.6
Total Cash flows		55.79	53.30	56.45	66.69	726.98
Discount Factor		0.87	0.76	0.66	0.57	0.50
Discounted Cash Flows		48.55	40.37	37.21	38.26	363.02
Sum of Discounted Cash Flows	527.4
Less: Total Debt	135.6
Equity Value	391.9
Total Number of Shares	12.2
Price Per Share	32.1

Exhibit 4: Sensitivity Analysis

If the WACC is 18%

Unlevered Free Cash Flows		55.7888	53.2968	56.4496	66.688	59.4104
Terminal Value						495.1
Total Cash flows		55.79	53.30	56.45	66.69	554.50
Discount Factor		0.85	0.72	0.61	0.52	0.44
Discounted Cash Flows		47.28	38.28	34.36	34.40	242.38
Sum of Discounted Cash Flows	396.7
Less: Total Debt	135.6
Equity Value	261.1
Total Number of Shares	12.2
Price Per Share	21.4


If the WACC is 12%

Unlevered Free Cash Flows		55.79	53.30	56.45	66.69	59.41
Terminal Value						990.2
Total Cash flows		55.79	53.30	56.45	66.69	1049.58
Discount Factor		0.89	0.80	0.71	0.64	0.57
Discounted Cash Flows		49.81	42.49	40.18	42.38	595.56
Sum of Discounted Cash Flows	770.4
Less: Total Debt	135.6
Equity Value	634.9
Total Number of Shares	12.2
Price Per Share	52.0

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Congoleum Corporation (Abridged) Harvard Case Solution & Analysis