A “Compelling And Pre-Emptive” Offer For The Valspar Corporation Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

A “Compelling And Pre-Emptive” Offer For The Valspar Corporation Case Solution

The cost of debt is calculated by dividing the interest expense with the long term debt in year 2015. The cost of equity is calculated through CAPM equation, by taking the risk free rate of a Treasury 10 year bond, market risk premium of 6.3% in the USA market, in 2015, and the Valspar’s beta of 0.9. The weight of equity and debt are determined by dividing the total equity and liabilities with the total assets in 2015. Lastly, the free cash flows of the firm are calculated and discounted at the WACC of 3.417%, which have resulted in the enterprise value of $58743784.82, out of which, the debt is subtracted and divided by the number of shares outstanding in 2015. The resulted share price through DCF valuation is $689.9.

Question 3

The EV/EBITDA and EV/Sales multiples are used to determine the share price of the Valspar Corporation. The median industry EV/EBITDA ratio of 12.1 is multiplied with the Valspar’s EBITDA in 2015, and divided by the total number of outstanding shares, resulting in the share price of $107.004.

Similarly, the median industry EV/Sales ratio of 1.9 is multiplied with the Valspar’s sales in 2015, and divided by the total number of outstanding shares, resulting in the share price of $101.2. The share price through both the multiples are less than the offered price of $106 by Sherwin William.

Question 4

The stock prices calculated through DCF valuation ranges from $212.97 per share to $689.99 per share, and the stock value calculated through multiple valuation has a range of $101.23 to $107.00 per share, as shown in the following chart:

Question 5

The offer price above $106 would be attractive to the Valspar’s management, and it would also best serve the shareholders’ interest as the standalone value of the Valspar’s stock is $212.97 per share. Moreover, the offer price should be greater because of the various synergies providing the strategic collaboration, i.e. the acquisition would reduce the company’s expenses as given below, which would ultimately lead towards higher profitability and EPS per share, which is a very attractive measure for the firm’s shareholders.

Cost Synergies
1	SG&A	2017- Reduction in cost	$134,000
2	R&D	Decrease per year	$16,000
3	COGS	Decrease per year	$144,000
4	Overlapping & manufacturing operations- expenses	Decrease per year	$26,000

Question 6

As shown in the stock summary; the better valuation results are offered by the DCF valuation as compared to multiple valuation. It is because, the DCF valuation takes into account the future cash flows and terminal value and determines the share value by discounting all of the future cash flows at the current level, while the multiple valuation does not take into account these future cash flows.

So, according to DCF valuation; the price offered by Sherwin William should range from $212.97 to $689.99.........................

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