WACC Definition
WACC = (D/V)*Rd*(1-T) + (E/V)*Re
where V = D + E, Rd is the pretax cost of debt, T is the tax rate and Re is the cost of equity
COST OF DEBT
Estimate Rd
Estimate tax rate
After Tax Cost of Debt
6.60%
43.40%
3.74%
COST OF EQUITY = Rf + Beta*MRP
Risk free rate as of April 1998
Market risk premium
(Exhibit 8)
6%
7.50%
Equity Beta
We use comparable firms. But, first we need to decompose Kohler into its various groups.
Exhibit 4
Kohler Co. Income Statements 1997 by Group (in $ thousands, as of December 31)
Kitchen & Bath
Group
Power
Systems
1,485,831
1,045,038
540,260
461,140
145,414
92,564
50,789
43,041
Gross Profit
440,793
79,120
52,850
7,748
Selling & Administrative Exp.
Amortization of Intangibles
Operating Income after Depr.
284,097
156,696
44,600
###
34,520
45,580
7,270
4,872
2,876
Non-operating Income (Expense)
Interest Income
Interest Expense
-6,400
1,477
10,181
-269
180
2,428
514
142
1,633
0
12
1,040
Pretax Income
141,591
32,004
6,292
1,848
Income Tax Expense
54,179
11,605
2,291
727
Net Income
87,411
20,398
4,001
1,121
Net Sales
Cost of Sales
Interiors Hospitality &
Group
R. Estate
Percentage of Sum of 4 Groups
Net Sales
Gross Profit
Net Income
Comparables (Exhibit 7b)
67%
76%
77%
24%
14%
18%
7%
9%
4%
2%
1%
1%
American American
Standard Woodmark
Stock Market Data as of 4/30/1998
Ticker
Shares Outstanding (in thousands)
Stock Price ($)
Market Value of Equity
Market Value of Equity,
Average of Latest 36 Mths.
Equity Beta Over Latest 36 Months
Masco
Briggs &
Stratton
ASD
71,929
48.69
3,502.0
AMWD
7,811
30.25
236.3
MAS
169,634
58
9,838.8
BGG
24,514
45.25
1,109.3
2,762.9
0.82
82.0
0.76
5,937.3
1.28
1,210.0
0.66
Financial Data as of 3/31/1998 a
Latest Twelve Months
Total Debt
Sales
EBITDA
Cash Flow
EBIAT
2,404.0
6,139.5
699.3
462.5
292.6
13.4
327.0
37.6
27.4
17.1
1,187.9
3,945.0
838.4
553.4
437.3
259.6
1,327.2
178.3
127.2
80.4
Average of Latest Three Years
Total Debt
Sales
EBITDA
Cash Flow
EBIAT
2,216.6
5,767.8
667
420.9
263.5
12.3
262.7
30.7
22.1
13.7
1,341.3
3,414.0
721.9
473.6
367.4
155.4
1,282.2
187
132.1
87.1
5,906.0
0.59
0.49
249.7
0.95
0.72
11,026.7
0.89
1.14
1,368.9
0.81
0.53
V=D+E
E/V
Asset Beta = Equity Beta*(E/V)
These are unlevered betas - assuming a common debt beta equal to 0
Next, relever to Kohler's capital structure
Kohler Equity (Exhibit 3a)
Kohler Debt
538992
513056
Asset Beta
Ba
0.78
0.78
E/V
D/V
0.81
0.77
0.19
0.23
Equity Beta
Be
0.97
1.02
Weighted Average of 80% Kitchen
and 20% Power Systems
0.78
0.80
0.20
0.98
Ke Calculate Using CAPM
Use Asset Beta = Equity Beta*(E/V)
Avg of Kitchen & Bath Comparables
Average of Power Systems Comparables
D/V = 1-E/V
( Calculated as per Projected Income Statement Exhibit 6b)
( Apr -98 20 year bond Yield)
( Assumed rate for Before 2000 year period)
What is the equity beta for a private firm?
Elim. & Corp. Var.
-8,891
(4,398)
-4,492
Kohler Co. Consol. Sum of 4 Groups Sum of 2 Major Groups
( Kitch & Bath + Power)
$
$
$
576,019
2,222,294
1,641,783
580,511
$
$
$
2,026,091
1,506,178
519,913
379,149
328,697
201,362
191,216
(6,155)
1,811
15,282
181,735
$
$
$
$
(6,669)
1,657
12,609
173,595
$
$
87,974
68,802
112,931
$
$
65,784
107,809
2,213,403
1,637,385
942
21,618
-27,052
380,091
21,618
174,310
409
426
(1,251)
-5,746 $
2,237 $
14,031 $
-24,965
156,770
(6)
68,796
-24,957
Percentage of Sum of 2 Major Groups
Kitchen and Bath Power Systems
73%
27%
85%
15%
81%
19%
Cummins Engine
Detroit Diesel
CUM
42,036
54.38
2,285.7
DDC
24,701
23
568.1
2,053.6
1.09
502.5
1.30
1,250.0
5,821.0
487
390.2
224.2
107.4
2,233.0
105.5
82.8
41
686.7
5,431.0
448.3
377.5
221
127.3
2,090.7
100.2
78.2
40.5
3,535.7
0.65
0.70
675.5
0.84
1.09
Rf
MRP
A-T Rd
Cost of Equity
Ke
13.24%
13.61%
13.32%
6.00%
7.50%
3.74%
A-T Cost of Debt
kd*(1-T)
3.74%
3.74%
3.74%
WACC
Kd*(1-T) * D/V+ E/V*Ke
11.4%
11.3%
11.4%
REFERENCE : Use Exhibit 7b OF THE CASE
Each multiple is the ratio of the total enterprise value (MVE+BV of Debt) to the accounting
American Standard
American Woodmark
Masco
Briggs & Stratton
Cummins Engine
Detroit Diesel
Market
Value of Equity
3502.00
236.30
9838.80
1109.30
2285.70
568.10
Total
Debt
2404.00
13.40
1187.90
259.60
1250.00
107.40
Average of Kitchen and Bath Comparable Companies
Median of Kitchen and Bath Comparable Companies
Average of Power Systems Comparable Companies
Median of Power Systems Comparable Companies
Average of All Six Comparable Companies
Median of All Six Comparable Companies
Weighted Average 80% Kitchen & Bath, 20% Power Systems ( based on % revenues of both group of Kholer Co.)
Kohler Co. Total Enterprise Values Implied by Multiples for Comparable Companies (in $ millions)
Sales
Multiple
EBITDA
Multiple
2,270
194.04
Average of Kitchen and Bath Comparable Companies
Median of Kitchen and Bath Comparable Companies
3420.65
2183.67
1826.47
1638.78
Average of Power Systems Comparable Companies
Median of Power Systems Comparable Companies
1468.94
1378.81
1380.30
1408.76
Average of All Six Comparable Companies
Median of All Six Comparable Companies
2444.80
1958.53
1603.39
1449.25
Weighted Average 80% Kitchen & Bath, 20% Power Systems
3030.31
1737.24
Kohler Co. Accounting Items for
12 Months ending 4/30/98
Kohler Co. Values Implied by Multiples --
Exhibit 7b OF THE CASE
VE+BV of Debt) to the accounting /valuation item of interest
Total
Enterprise Value
5906.00
249.70
11026.70
1368.90
3535.70
675.50
Sales
Multiple
0.96
0.76
2.80
1.03
0.61
0.30
EBITDA
Multiple
8.45
6.64
13.15
7.68
7.26
6.40
Cash Flow
Multiple
12.77
9.11
19.93
10.76
9.06
8.16
EBIAT
Multiple
20.18
14.60
25.22
17.03
15.77
16.48
1.51
0.96
9.41
8.45
13.94
12.77
20.00
20.18
0.65
0.61
7.11
7.26
9.33
9.06
16.42
16.48
1.08
0.86
8.26
7.47
11.63
9.94
18.21
16.75
1.33
8.95
13.01
19.29
Cash Flow
Multiple
EBIAT
Multiple
Avearge of
4 Multiples
Median of
4 Multiples
119.13
98.34
1660.21
1521.26
1966.88
1984.95
2218.55
1832.16
1896.67
1811.87
1111.14
1079.47
1615.14
1620.21
1393.88
1371.81
1424.62
1393.78
1385.67
1183.85
1791.01
1647.28
1806.22
1559.73
1697.20
1548.27
1550.39
1896.53
2053.62
1816.88
f both group of Kholer Co.)
n $ millions)
Valuation date: 4/30/98
Discounted Cash Flow Valuation ( all figures in $ thousand)
WACC
Perpetuity growth rate ( g)
11%
4%
1998
1999
2000
2001
160,121
126,032
171,619
187,978
44.3%
43.42%
43.42%
43.42%
70,872
54,724
74,518
81,621
89,249 $
71,308 $ 97,101 $ 106,357
Operating Income after Depreciation
Tax Rate
Taxes
EBIAT ( NOPAT)
Depreciation and Amortization
Net Capital Expenditures
Change in Net Working Capital
Free Cash Flow
$
$
$
$
56,113
(87,691) $
(1,435)
24,224
87,661
(97,205) $
(5,762)
56,002
91,786
(96,971) $
(27,705)
64,211
94,593
(96,811)
(17,702)
86,437
Discounting Period (mid-period)
Present Value
Present Value of Cash Flows
1.17
$49,565
2.17
$51,199
3.17
$62,091
0.33
$23,404
239,085
Terminal Value
Present Value of Terminal Value
874,192
Total Enterprise Value
$ 1,113,277
$
$
You can change the valuation by having a monority discount (start approx 20%) Al
2002
2002 Normalized
201,604
201,604
43.42%
43.42%
$
87,537
114,067
87,537
114,067
NWC
97,355
(106,647)
(23,145)
81,630
-23145
90,922
4.17
$52,827
4.17
$58,840
9,097
6,644
(15,744)
21707
-23139
(1,435)
$1,350,840
onority discount (start approx 20%) Also tack on discount for market instability (start approx 40%)
Shares
COMMON VOTING STOCK
RESTICTED VOTING STOCK
NON VOTING SERIES A STOCK
NON VOTING SERIES B STOCK
TOTAL
INITIAL ( BEFORE RECAP)
7445
142.89
0
0
7587.89
Apr-98
9000
250000
2196000
45000
2500000
Dec-98
( Additional)
6611
33965
1613084
33055
1686715
Total
15611
283965
3809084
78055
4186715
