Valuation of Acquisition & Finance Decision
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Pinkerton Valuation
Cost of Capital
The cost of capital is a rate at which the future cash flows are discounted to get true value. Meanwhile, it is also a minimum rate of return that investors require from the investment. Indeed, it can be determined that cost of capital for the Pinkerton was calculated with assumed values from the Wackenhut a similar company to Pinkerton. Therefore, we could assume that the equity cost of capital for the company is 14.25%
Indeed, the role of discount rate is very important in the valuation. Because, the irrelevant discount rate could ruin the whole valuation process, and would lead to the inappropriate value. However, it can be determined that there are many complications that needs to be recognized. Because, the company has to be acquired by the California Plant Protection (CPP) company that is completely solely owned by one person. See the Exhibit 1 for the cost of equity.
Therefore, it was very important for the company that it should approach to the proper discount rate to discount the future free cash flows generated by the company. However, it can be determined that the Pinkerton company has been owned by the American brand, and it has no debt since it was being operated by the major market player that was the American Brands in the market. Therefore, the cost of equity was best option for the company to discount the Pinkerton’scash flows.
Net Present value
Since, the expected growth in terms of after acquisition and before acquisition has been given. Meanwhile, the constant growth rate for the revenues is 5% after year 1990, where the capital expenditure would grow at steady rate of 4% yearly. Meanwhile, the net present value was calculated through by first calculating the free cash flows to the company each years. On the other hand, the free cash flows refers to the amount that would be left behind after meeting all obligations that company has to meet.
Pinkerton (A) Valuation of Acquisition & Finance Decision Harvard Case Solution & Analysis
Similarly, it is amount of the money that is left behind and that could be reinvested, or it can be paid to the investors in terms of dividend. Meanwhile, Pinkerton has positive free cash flows, and has good potential in the market to grow at the steady rate. Because, it’s free cash flows are positive, but the free cash flows are decreasing in the company. However, it can be determined that decreasing free cash indicates that company’s revenues are declining. But, it has potential to grow in the market.
Meanwhile, the first year free cash flow of the Pinkerton in 1987 is $16.2 million, and the free cash flow of the company in 1992 declines to the $7.7 million, since it decreases by around 52%. On the other hand, the revenues of the company has decreased from $367.5 million to $315.1 million, which decreased around by the 14% in same time period of free cash flows. Meanwhile, it can be determined that the revenues has major impact on the free cash flows...........
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