ESKIMO PIE CORPORATION Harvard Case Solution & Analysis

ESKIMO PIE CORPORATION Case Solution

Introduction

The case talks about the alternatives available with Reynolds Metal for its sub division Eskimo Pie. Reynolds Metal’s core business is production of Aluminum related products, who was considering selling of its 84% owned Eskimo Pie Corporation which deals in branded frozen novelties and the consideration received from the sales proceeds would be used to further expand the aluminum business.

eskimo pie corporation case solution

eskimo pie corporation case solution

The company’s executives were focusing on the alternatives available to gain the highest proceed for its Eskimo division. Among the number of prospective buyers, Nestle Foods is providing the relatively highest value offer of about $61 million. After calculating the value of Eskimo Pie with the help of different valuation techniques including the discounted cash flow method and with the help of comparable companies, some recommendations could be made. In addition to this, since there are some delays in the purchase made by Nestle, there is one other alternative available with Reynolds Metals that include the consideration which the company could receive from going public with the help of IPO, rather than selling the company to Nestle Foods.

Problem Statement

The main problem in the given case is related to the higher return which Reynolds Metal was interested in getting from either selling its Eskimo Pie division or taking it public through the IPO which would be analyzed qualitatively as well as quantitatively in this report to make some recommendation which would also be compared with what actually happened?

Stand Alone Valuation

 Stand Alone Valuation for the Eskimo Price is required to be computed in order to compare them with the offers made by prospective buyers. In order to value the company, different valuation techniques have been used. The stand alone valuation should be dependent on the firm’s assets as well as the projected income. Therefore, the first method that could provide the forecasted future free cash flows is the discounted cash flow method which with the help of appropriate discount rate could provide the enterprise value of the company.

With the help of CAPM approach, cost of equity of the company is computed; using the comparables data, asset beta is computed to be about 1.14. Risk-Free rate for the company is 4.56% and Market Risk Premium is 9.20%.

The value of cost of equity is computed to about 15% as illustrated below in the exhibits. The weighted average cost of capital of Eskimo is computed with the help of given formula:

The value of tax is given in the case to be about 40%, all the remaining variables in the above formula are computed with the help of given financial statement of the company. The weighted average cost of capital as illustrated in the below given exhibit is computed to be 12%. By discounting the future free cash flows with the help of this discount rate, the enterprise value of the company is computed to be about $ 41.492 million, by adding the value of net debt in this enterprise value, the equity value of Eskimo is computed to be about $ 53.932 million as illustrated in the below given exhibit. It can be seen that the intrinsic value computed with this method provides a much favorable results when comparing it with the offered price of Nestle.................

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