Hope Enterprises Harvard Case Solution & Analysis

QUESTION #1

What is Hope worth? We have not yet decided whether to pursue a purchase of assets or

a purchase of equity, so provide me with both your enterprise and equity values.

CHN is a company that trades in the hotel industry and it has quite a good experience in this industry. Moreover, the management of CHN is quite good at turning the under performing companies into better perfomers. Similarly, the market in which CHN is operating is having intense competition,therefore CHN will have to make a decision, which should result in the best interests of its shareholders and ultimately,it would incorporate its product line in order to expand its business further.

Hence, CHN is trying to evaluate the purchase of Hope enterprises. The company will be able to enhance its own position in the hotel business and gaming casino market after the purchase of Hope enterprises. Despite this, the evaluation of Hope enterprises is shown in the exhibits, which includes the evaluation that has been performed for a period of five years in order to reflect a better picture that will prove beneficial for the future growth of both enterprises. The revenue has been calculated over a time period of five years and the growth rate that has been used to grow the level of sales revenue is almost 12.00%.

Apart from that, the sales revenue is showing a sufficient increase in these five years, which is better than the past figures. It seems that by adding this with CHN, its prospects can be improved further. Despite this, the sales hada value of $1232 in year 1996 and it wase stimated to be almost $1804 in the fiscal year 2000.

The cost of goods sold is showing an increasing trend, how ever it is comparatively lower than the revenue and it seems that the company might handle the costs efficiently in the future. The cost of goods sold in year 1996 is almost $660 and in the year 2000 it is $966 million. Hence, the resulting gross profit is also showing an increasing trend, and it may relatively increase from $572 to $838 million. The selling, general and admin expenses are also taken into account because they are likely to have a greater impact upon the value of Hope.

The reduction in SGA has been performed by almost 1% of sales, also its value in 1996 was 12.32 million and 18.04 million in the year 2000. Furthermore, the EBITDA has also been taken into account in order to help the management of CHN to appraise the value of Hope effectively in order to avoid making an ineffective decision while performing an expansion of its business. The value of EBITDA in year 1996 was$329 million and in the year 2000 it was$482 million.

The value of capital expenditure is also taken into account and the value was $80 million in 1996 and was the same in 2000, which was approximately 80 million. Furthermore, the depreciation has been added back to the values after EBITDA. The value of depreciation in 1996 was$85 million and in 2000 it was$105 million, which showed an increasing trend. Similarly, the treatment of increase in the working capital has also been taken into consideration,which reflects a value of almost $6 million in 1996 and $3 million in 2000.

Furthermore,the value of pre-tax cash flows have been obtained, which is showing an increasing trend from $328 million up to$504 million in 2000. The income tax rate is taken from the available information and it has been applied to the pre-tax cash flows in order to get the value of cash flows after tax. The income tax rate that is used is almost 40% and the value of after tax cash flows in 1996 and 2000 was almost $196 million and $302 million.

Lastly, in order to decide whether to make an acquisition of Hope enterprises, there is a need to evaluate the value of enterprise and its equity value. Therefore, as per the exhibits Hope’s value is almost $925.18 million and this is the amount that CHN will have to pay if it is willing to make an acquisition of Hope enterprises. On the other hand, the value of equity is almost $0.985 million and the discount factor that has been used is approximately 8.64%.

Hope Enterprises Case Solution

In addition to this, the capital structure of Hope has a percentage of 33.24% and the remaining percentage is allocated to the market value of debt i.e. 66.76%. The value of equity beta of 1.25 is used in the capital asset pricing model in order to evaluate the weighted average cost of capital. The percentages related to the risk free rate and the market risk premium are 5.93% and 8.80%...............................

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