1a)

Total Liabilities
Total Value
Debt/Value

3588.3
5486.7
65.4%

Financial Debt to value

Long-term debt 895.3
Current debt
37.2
Total Debt
932.5
Total debt/Value 17.0%

1b)
ROR (rE) = rf + (premium)
rf
8.50%
premium
8.40%

0.74
re
14.72%

1c)
Pre-bid WACC calculation:

0.74
D
932.5 This follows Galvestone example. D is financial debt not liabilities.
re
14.72%
E
6320.8
tax
44.8% <- Exhibit 1, 1987 taxes
rd
11%
D+E
7253.3
Equity = 131M * 48.25 = 6320.75M
WACC
13.60% <- re(E/D+E)+rd(1-t)(D/D+E)

Post-restructure
We unlever first, then lever it with target debt structure
New debt structure
u
new l
rd
re
WACC

0.68 <- /(1+(1-T)(D/E)) with old D/E

0.87 <- u*(1+(1-T)(D/E) with new D/E E

10.00%
D+E
15.83%
12.40%

2
3

2)
Q2 UFCF

Sales
EBIT

Tax 40%
NOPAT
Cash Proceed
Dep-CapX
CapX
deltaWC
UFCF
PV of CF
Total PV of CF
ru

1989

1990

1991

1992

1993

1994

1995

1996

6,515
1,280
512
768
2,146
0
0
0
2,914
2551.7
7260.7
14.20%

6,804
1,487
595
892
0
0
0
12
880
674.9

7,125
1,671
668
1,003
0
0
0
13
990
664.4

7,481
1,755
702
1,053
0
0
0
14
1,039
610.9

7,855
1,842
737
1,105
0
0
0
15
1,090
561.3

8,248
1,935
774
1,161
0
0
0
16
1,145
516.2

8,660
2,031
812
1,219
0
0
0
16
1,203
474.7

9,093
2,133
853
1,280
0
0
0
17
1,263
436.5

1997

1998

9,548 10,025
2,239 2,351
896
940
1,343 1,411
0
0
0
0
0
0
18
19
1,325 1,392
401.2 368.9

Q3
The market responded favorably for Kraft's stock as it increased the share price by almost 47% the first day and rose up to th
This could be because of various reasons, the most probable reasons being:
i. Market agreed with PM's valuation of Kraft's stock as the purchaser would have performed higher level of due diligence com
ii. The lowest price that the purchaser of the stock would get is the one offered by PM, i.e. $90/share. This limits the downsid

The market wasn't so favorable with PM's share as it's price went down 5% after the offer. This could be due to various reaso
i. Market wasn't as enthusiastic with PM's plan and thought the company is over paying for a stock whose last trading value w
ii. The change in price is not significant. In the days leading to the offer, PM's stock price had 1-4% swing. This could be consid
iii. It is common to see the price of the stock going slightly low for the aquiring company.

Q4
Assuming 131M shares issued at the time of restructuring, the value to the share holder is
Value per share
$110
Number of share 131M
Total value
1.4B
This value comprises the estimated share value at $12/share and will be subject to market's valuation.
Q5
First of all, the restructuring provides $84/share dividend upfront along with $14/share high yield debt and continued equity
is higher than the price offered by PM ($90/share). More importantly, the gain from PM offer is taxable, however dividend is
tax gain for dividend and debt is realized with the offer.
Rest follow Marc's writeup, mine got too convoluted
Q6
Q5 sort of answers Q6.
1989

1990

1991

1992

1993

1994

1995

1996

1997

Sales
6515
EBIT
1280
Interest
1380
Tax
-39
NI
-61
D/A
0
CapX
0
deltaWC
0
Principal Debt Payment
CF to Equity
-61

6804
1487
1270
89
128
0
0
12

7125
1671
1310
148
213
0
0
13

7481
1755
1286
192
277
0
0
14

7855
1842
1278
231
333
0
0
15

8248
1935
1257
278
400
0
0
16

8660
2031
1212
336
483
0
0
16

9093
2133
1155
401
577
0
0
17

9548 10025
2239 2351
1086 1010
473
550
680
791
0
0
0
0
18
19

116

200

263

318

384

467

560

662

1998

772

financial debt not liabilities.

Projected Tax (Exhibit 12)

40%

4%

5%

5%

5%

5%

7% the first day and rose up to the level of the price offered by PM the next day

d higher level of due diligence compared to an average investor

90/share. This limits the downside while there still is a chance of stock further going up.

This could be due to various reasons:

a stock whose last trading value was only $60
d 1-4% swing. This could be considered normal market behavior.

yield debt and continued equity in the company valued at $12/share. The total valuation
er is taxable, however dividend is not taxable and debt provides further tax shield. Hence a potential