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Control Value Analysis with Damodaran

This document provides inputs and calculations to value a firm under its current status quo and an optimal scenario. It calculates the firm's cost of equity, cost of debt, cost of capital, after-tax return on capital, expected growth rate, and value under each scenario based on inputs like the riskfree rate, risk premium, beta, tax rate, revenues, EBIT, debt ratio, and reinvestment rate. The optimal scenario results in a higher pre-tax return on capital, after-tax return on capital, expected growth rate, terminal value, and overall firm value, resulting in a value of synergy of $119.40 million.

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13 views3 pages

Control Value Analysis with Damodaran

This document provides inputs and calculations to value a firm under its current status quo and an optimal scenario. It calculates the firm's cost of equity, cost of debt, cost of capital, after-tax return on capital, expected growth rate, and value under each scenario based on inputs like the riskfree rate, risk premium, beta, tax rate, revenues, EBIT, debt ratio, and reinvestment rate. The optimal scenario results in a higher pre-tax return on capital, after-tax return on capital, expected growth rate, terminal value, and overall firm value, resulting in a value of synergy of $119.40 million.

Uploaded by

api-3763138
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLS, PDF, TXT or read online on Scribd

Inputs

Current riskfree rate = 4.50%


Risk Premium = 4.00%
I will assume that there are zero excess returns beyond your high growth phase.

Status Quo Optimal


Beta 0.90 1.06
Pre-tax cost of debt 6.00% 7.00% Hints on control value
Tax rate 40.00% 40.00% 1. Check on capital structure
Debt to Capital Ratio 10.00% 30.00% 2. Check on current pre-tax
3. Check after-tax return on
Revenues $1,000.00 $1,000.00 4. If return on capital is high
Operating Income (EBIT) $50.00 $60.00 5. If the firm has potential fo
Always work within the realm
Pre-tax return on capital 10.00% 15.00%
Reinvestment Rate = 30.00% 30.00%

Length of growth period = 5 5

Computed Values Value of firm with synergy


Cost of Equity = 8.10% 8.74%
After-tax cost of debt = 3.60% 4.20%
Cost of capital = 7.65% 7.38%

After-tax return on capital = 6.00% 9.00%


Reinvestment Rate = 30.00% 30.00%
Expected growth rate= 1.80% 2.70%

Value of firm
PV of FCFF in high growth = $89.07 $110.45
Terminal value = $448.04 $582.39
Value of firm today = $398.99 $518.39

Value of Synergy
Value of status quo $398.99
Value of optimal $518.39
Value of control $119.40
nts on control value
Check on capital structure to see if a different mix can lower cost of capital (Use capital structure spreadsheet which is ava
Check on current pre-tax operating margin and check against industry averages; May provide clues for potential cost cutti
Check after-tax return on capital. If it is below cost of capital, set at least to cost of capital. If it is above the cost of capita
If return on capital is high, check reinvestment rate. If it is very low, check to see if there is potential for increase.
If the firm has potential for competitive advantages, see if you can lengthen the growth period (will work only if there are
ways work within the realm of the possible…
spreadsheet which is available online)
es for potential cost cutting
s above the cost of capital, check against industry averages and historical trend line.
ntial for increase.
will work only if there are positive excess returns).

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