Hope Enterprises Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

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.

As CHN is the company trading in the hotel industry since long time and it is having quite a good experience in this industry. Moreover, the management of CHN is quite good at turning the under performing companies into better perfomers. Relatively, the market in which CHN is operating is having intense competition and therefore CHN will have to make a decision that should result in the best interests of its shareholders and ultimately that it is incorporating into its 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’s market after the purchase of Hope enterprises. Despite this, the evaluation of Hope enterprises is shown in the exhibits which includes, the evaluation has been performed for a period of five years in order to reflect the better picture that will prove beneficial for the future growth of both enterprises. The sales 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%, respectively.

Other than 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 made better even further. Despite this, the sales almost have a value of $1232 in year 1996 and it is estimated to be almost $1804 in the fiscal year 2000.

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

The reduction in SGA has been performed by almost 1% of sales, its value in 1996 is 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 is $329 million and in the year 2000 it is almost $482 million.

The value of capital expenditure is also taken into account and the value in 1996 is 80 million expenditure and its almost the same in 2000 which is approximately 80 million. Then, the depreciation has been added back to the values after EBITDA. The value of depreciation in 1996 is $85 million and in 2000 it is $105 million, which is showing an increasing trend. Relatively, 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.Hope Enterprises Case Solution

Thereafter 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 is almost $196 million and $302 million, respectively.

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%....................

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