Discover Capital Case Study Solution
Killing a dealand managing a Dead Deal
A deal with a potential investor is killed by terminating an agreement and return of the principal amount of investment and returns to the investor. After killing the deal, the deal becomes a dead deal. However, a dead deal should be renewed in order to continue availing the gains and returns from the deal. It could be done by offering a new deal to the investor or offering renewal of the dead deal with certain modifications.(William Sahman, 2015)
Proposed Valuation
Proposed valuation refers to the valuation of an investment opportunity on the basis of its expected cash flows during its life time. An opportunity is valued by computing various capital budgeting tools i.e. NPV, IRR etc., by using the expected cash flows from the opportunity. The value of an opportunity can be analyzed using NPV. If the NPV is positive the opportunity is feasible and vice versa. The value of an opportunity using IRR can be analyzed by comparing the IRR with the company’s WACC. If the IRR is greater than WACC, the opportunity is feasible and vice versa.(Brigham, 2016)
Potential IRR for proposed opportunity
Potential IRR is calculated using the excel sheet is 19% showing the feasibility of the proposed investment opportunity. The IRR shows that the opportunity would bring positive cash flows and a net benefit to the company.
Acquisition of Pilates Opportunity
Acquisition of the Pilates opportunity is feasible on the basis of above calculated IRR. The exact price for acquisition of Pilates opportunity is the PV of the cash flows generated from the opportunity discounted by using WACC.
Exhibits
Exhibit A: Comparison of Broker Investment Banker and Proprietary Search
| Broker | Investment Banker | Proprietary Search | |
| Fees | Low | High | No |
| Expertise | Moderate | High | Low |
| Time Required | Moderate | Low | High |
| Risks | High | Low | No |
Exhibit B: IRR Calculations
| IRR Calculations | |
| 2015 | |
| 2015 EBITDA (3yr avg) | $2,030 |
| Exit Multiple | 5.0x |
| Enterprise Value | $10,152 |
| Debt | $0 |
| Excess Cash | $2,537 |
| Total | $12,689 |
| Equity Invested | $3,900 |
| Search Equity | $600 |
| Search Step | $300 |
| Total Equity | $4,800 |
| Pref Return (7.5%) | $2,091 |
| Investors Get First | $6,891 |
| What is left | $5,798 |
| Investors get 70% | $4,058 |
| J&J get 30% | $1,739 |
| Investors in total | $10,949 |
| Equity Invested (no step) | $4,500 |
| IRR | 19% |
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