Health Care Manufacturing Inc. Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Valuation of Company for Thompson

Liquidation Basis

Liquidation model uses the assets fair value on piece meal basis and deducts all the liabilities of organization in order to reach at the valuation of organization this method provides the minimum possible value of organization. Valuation of HCM using this method will provide the minimum value of its net assets, furthermore, the valuation of its inventory, tax credit from research and development expense and trade receivables have been adjusted in order to present the fair market value of its net assets. Based on the liquidation method, HCM is valued at $1,932,810/- (Appendix-B).

Past Trading Cases

The information provided in exhibit 8 can be moulded in order to calculate market value of HCM operations. Equity value of each company has been calculated using its outstanding debts and debt to equity ratio. Further, the equity and market capitalization ratio has been used in order to arrive at the benchmark for calculating HCM’s value, meanwhile, that equity to market capitalization ratio has been compared with the equity value of HCM. Additionally, the average of three different valuations gives $375,704/- (Appendix-B).

Comparable Companies

On the other hand, information of comparable companies contains information such as price to earnings ratio, which is quite a well-known valuation method, however, the data relates to U.S listed companies and their market capitalization ratio is much higher than the market capitalization of HCM. Therefore, straight away use of price to earnings ratio of these US listed companies will not be a reasonable multiplier for valuation of HCM operations. Hence, the price to earnings multiplier has been adjusted and decrease by 50% in order to make a fair comparison, meanwhile, earning of HCM and adjusted price to earnings multiplier of comparable companies has been used to arrive at the market value of HCM and average value of these earnings multiplier gives the valuation of $2,620,541/- (Appendix-B).

Discounted Cash Flows

This is the most reliable and widely used valuation model and this model uses the cash flows generated over the life of the project. Furthermore, these cash flows are discounted using the risk adjusted cost of capital, which represents the risk associated with the specific project. However, HCM revenue forecast has been prepared by Thompson based on his expectation of future performance of HCM operations, meanwhile, in order to calculate the appropriate cost of capital equity beta of US listed companies, it has been un-geared using their respective gearings. In addition to this, since the HCM is also a leveraged company, therefore, asset beta or industry beta of health care industry has been re-geared using the gearing of HCM (Appendix-B).

Cash flows of first two years have been calculated using the projected financial statement of 2007 and 2008 and after two years terminal values has been calculated using the 3% growth rate till perpetuity. However, terminal values are not very reliable but since the business is to be operated over the foreseeable future, therefore, cash flows after year 2008 has been used to calculate terminal values. In this way, net present value of HCM cash flows gives the enterprise value of HCM and equity value of HCM has been arrived after adjusting the liabilities and available cash. Discounted cash flow valuation model gives a value of $2,426,310/- to HCM’s equity (Appendix-C).

However, this should be noted that the reliability of equity value calculated above depends on number of factors such as the reliability of forecast prepared and cost of capital calculated using the beta of US listed companies.

Valuation of Company for Great Wall Holdings

In order to recalculate the value of HCM for Great Wall Holdings, projected financial statement of HCM has been adjusted for the 30% increase in revenues and necessary adjustment in cost has been made. In addition to this, initial investment acquisition of additional warehousing facility has also been incorporated in the project cash flows of HCM. Moreover, the working capital requirement has also been adjusted as percentage of earnings before the interest and tax figure......................................

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