Question 2
Capacity Expansion Analysis
The acquisition of the germicidal, sanitation and antiseptic products unit from the Montagne Medical Instruments Company provides the Sterling Household Products Company with an advantage to invest and expand the capacity of the unit in order to increase the sales and profit. For the evaluation of the unit acquisition with the option of capacity expansion, DCF (Discounted Cash flow) is calculated. The value of the calculated WACC is same as of without expansion that is 9.36%
Additionally, discounted cash flow analyzed by using data from the 2013 to 2020 in order to examine the unit acquisition with the option of capacity expansion. The Perpetuity Growth Rate is taken as 2.2% in the calculation and the value of free cash flow for the year 2013 is $22,620 thousandwhereas in the year 2020 its value will be$267,600 thousand. Moreover, the present value of free cash flow expected in 2013 is $ 20,683 thousand while for the year 2020, the present value of free cash flow is $142,927 thousand. The calculated terminal value of all the cash flows for the year 2013 through 2020 is $ 82,192 thousand. However, the enterprise value of the acquisition is the $ thousand that is calculated by taking the sum of all, the present value of cash flows from the year 2013 to 2020 minus the capital expenditure of $60 million. Therefore, the calculated enterprise value of the acquisition is $441 million (Exhibit 5).
Question 3
Yes,Montagne should acquire the GSAP unit for $265 million. As, it is concluded that the unit of the Montagne Medical Instruments Company appears to be more than the worth of $265 million value with the option to expand as the calculated worth of the unit is appearing to be more than the negotiated value of the $265 million from the results that get from using the DCF (Discounted Cash flows) for the unit acquisition with the option of capacity expansion.
Additionally, the results from the analysis of the discounted cash flow that calculated value of the unit acquisition is $ 441 millionwhich shows that it will be worthwhile for the Sterling Household Products Company to acquire the Montagne Medical Instruments Company unit. As, the decided purchase price of the unit is $176million less than the calculated value by using the DCF (Discounted Cash flows).
Therefore, the decision from the point of view of Sterling Household Products Company should be toacquire the unit of the Montagne Medical Instruments Company as its calculated value is more than the decided purchase price showing that the unit is of greater worth after expanding the capacity that may result in higher sales and profit growth for the company. According to the analysis of the discounted cash flows it is valuable for the Sterling Household Products Company to acquire the germicidal, sanitation and antiseptic products unit from the Montagne Medical Instruments Company at the price of$ 265 million.
Sterling Household Products Company case study solution
Furthermore, in the end it is determined that there are more potential benefits of this acquisition as compared to the potential risk as this acquisition offers the combined effect that will add the value to the existing operations of the Sterling Household...............................
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