Conrail (A) & (B) Case Study Solution
Thus, the range of the price per share for CSX to offer for Conrail is $61.17 to 149.316, and the average of the range is $102.01. The price-calculated using the multiple approach is significantly higher than the blended value of Conrail, i.e. $89.09 per share. The offer made by CSX is the two-tier offer, which was worthy of the estimated value of 8.3 billion dollars. The offer was structured in the way to gain an effective control of the corporation at the first stage and then acquiring the remaining share sat more favorable prices.
Valuation through Discounted cash flow method
Appropriate discount rate for synergy cash flows
The company’s cost of capital is calculated with the use of the information provided in the case. The cost of equity is calculated on the basis of inputs in the case.The cash flows are discounted, using the costof capital which is calculated based on the capital asset pricing model(CAPM). The risk free rate of return is the United States’ 30-year treasury rate; whereas the market risk premium is assumed to be 7 percent and beta of Conrail is 1.3. By combing all these components;the cost of equity is calculated to be 15.93 percent.
Value ofConrail to CSX
With the use of the financial projections provided in the case; the valuation of the company is performed using the discounted cash flow model. The rationale behind using the discounted cash flow method is that theCSX would be willing to pay a maximum of the company’s current market value as well as thesynergetic value, expected to be realized from the merger.The growth rate of 3% is used in the valuation, which is very adequate and ensures good financial returns. The expected increase in the cash flows resulting from the synergies is provided in the case. The total value of Conrail is estimated to be $2032; whereas, the incremental net present value of the offer is $22.45. The standalone value of 71 dollar per share is added into the synergetic value, in order to calculate the share value of Conrail, providing a share price value of $93.45. The multiple approach provided the range of Conrail’s share price,which is from $61.17 to $149.316.Whereas, the discounted cash flow method provides the share price value of $93.45. Hence, because of the large range of share price valuegenerated by multiple approach;the discounted cash flow model is supposed to be more reliable.(Edleson, 2019).
In addition to this, the higher projections of the synergy gains are used for valuing the share price of Conrail and assessing the difference between the lower and higher projected gains from the merger. Similarly, the valuation is performed with the use of the discounted cash flow model (DCF) from 1997 to 2001. The terminal value is estimated to be $1859, which demonstrates the value of the business beyond the explicit projected time period. Moreover, the net present value of the company is estimated to be $2689 million, which is significantly higher than the net present value calculated with the use of the actual projected gains from the merger. Furthermore, the synergies per share is calculated to be $29.71, which is calculated by dividing the enterprise value by the number of outstanding shares of 90.5 million. Also, the share price of the company is estimated to be $100.713, which is significantly rater than the share price calculated with the use of the projected gains from the mergers. Thus, the difference in the price of share of Conrail is backed by the fact that the valuation using the higher projected gains, resulted in an increased amount of net present value and share price..............
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