Congoleum Corporation (Abridged) Harvard Case Solution & Analysis

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 rate9.50%
Market Risk Premium8.60%
Beta1.25
Cost of Equity20.25%
Cost of Debt7.50%
Total Debt135567
Total Equity187485
Debt Ratio42%
Equity Ratio58%
Growth Rate6%
WACC14.9%

Exhibit 2: Current Value of Congoleum Corporation

Equity Value187.485
Total Number of Shares12.2
Price Per Share15.368

Exhibit 3: Unlevered Free Cash Flows

 012345
Operating income (Exhibit 15)105.9111.5132.2158.7175.9166.1
Less: corporate expenses8.64.35.15.96.87.6
depreciation & amortization7.535.5136.2637.0737.9521.23
Earnings before interest & taxes89.871.6990.84115.73113.15137.27
Less: tax (@ 48%)43.134.443.655.654.365.9
Profit after taxes46.737.347.260.258.871.4
Adjustments:
Add back depreciation + amortization35.5136.2637.0737.9521.23
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 Flows55.79 53.30 56.45 66.69 59.41
Terminal Value667.6
Total Cash flows55.7953.3056.4566.69726.98
Discount Factor0.870.760.660.570.50
Discounted Cash Flows48.5540.3737.2138.26363.02
Sum of Discounted Cash Flows527.4
Less: Total Debt135.6
Equity Value391.9
Total Number of Shares12.2
Price Per Share32.1

Exhibit 4: Sensitivity Analysis

If the WACC is 18%
Unlevered Free Cash Flows55.788853.296856.449666.68859.4104
Terminal Value495.1
Total Cash flows55.7953.3056.4566.69554.50
Discount Factor0.850.720.610.520.44
Discounted Cash Flows47.2838.2834.3634.40242.38
Sum of Discounted Cash Flows396.7
Less: Total Debt135.6
Equity Value261.1
Total Number of Shares12.2
Price Per Share21.4
If the WACC is 12%
Unlevered Free Cash Flows55.7953.3056.4566.6959.41
Terminal Value990.2
Total Cash flows55.7953.3056.4566.691049.58
Discount Factor0.890.800.710.640.57
Discounted Cash Flows49.8142.4940.1842.38595.56
Sum of Discounted Cash Flows770.4
Less: Total Debt135.6
Equity Value634.9
Total Number of Shares12.2
Price Per Share52.0

 

 

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