Kohler Co Case Study Solution
Financial Analysis:
Initially we have evaluated the company using the peer company’s data. We have taken an average to get a rough idea of the total value of Kohler on the basis of Peer Company’s information and this averaged to be a $2847.98 million company (Exhibit 1). The equity to value ratio resulted in 73.43% which means the company’s equity is higher than its debt which is the balance of 26.57%. The CAPM is 10.31% which means the investor should get a return of this percentage. The WACC of the company is 8.56% this is the least that a company will produce for its investors. In (Exhibit 2) we have used the Peer company’s beta and calculated the WACC, CAPM and the ratios. As per the calculations the total value of company is higher than the average of peer companies. The company’s equity value is also 78.16% which is higher, debt is lower and better than the average of peer companies. WACC is almost the same and that isn’t that alarming for the company. The CAPM is same in both the calculations. The tax rate of the company is 43% on average.
The intrinsic value per share is 381,278 and the total equity is worth 2,893,098,974 (Exhibit 3)as per the calculations done on the basis of market multiple approach.
Following assumptions are taken under consideration in order to arrive at a value of $55,400 value per share.
- Growth is expected to increase by 2%
- Discount rate is assumed to be taken as 31%
By taking such assumptions under consideration, the appraiser of Kohler must have appraised he company which discounted the value of the company heavily but these assumptions are not reasonable since such a high discount rate is not used in appraising a company. Also, the financial position of Kohler is not very bad nor it has a lot of debt burden which can increase its WACC sharply to 31%.
Following assumptions are taken under consideration in order to arrive at a value of $273,000 value per share.
- Growth is expected to increase by 3.05%
- Discount rate is assumed to be taken as 11.018%
By taking such assumptions under consideration, the project can be appraised on the above mentioned assumptions. these assumptions are not reasonable since discount rate is merely manipulated to bring the value of 273000 whereas the discount rate calculated through the financials of the company are authentic and reflects true value of the company.
Considering the likelihood of winning or losing the case, it would be in the best interest of Kohlar should settle at a price 25% above the $55400 per share value since avoiding the trial will also save money for both of the parties. The amount and time that can be saved from the trial will help both the companies to settle the case outside the court. Since Kohlar would be paying only 25% more and the other party would be getting more than what kohlar had proposed before therefore it would be a win-win situation for both the parties.............
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