Case study: Kohler Co.

Private Company Valuation HBS Case

Methodology
1. 2. 3. 4. Case summary Valuation: Income approach (DCF) Valuation: Market approach (Multiples) Discount for lack of control and marketability 5. Valuation summary (intrinsic value per share)

2. Income approach
Apply the corporate value model Find the market value (MV) of the firm (assets), by finding the PV of the firms future Free Cash Flows (FCFs). Dont forget the terminal value (use constant growth model) Subtract MV of firms total liabilities to get MV of common stock. Divide MV of common stock by the number of shares outstanding to get intrinsic stock price (value). You can use any correct measure of FCFs (one measure is discussed in the notes posted on the web ( Financial Statements) Free Cash Flow to the firm: EBITx(1-T) + Depreciation - Change in Operating Working Capital Capital expenditures Free Cash Flow to the firm (this case): (Operating income after depr.)x(1T) + Depreciation and amortization (tangible and intangible) - Change in Operating Working Capital Purchase of Property, Plant and Equipment

Cost of capital (WACC)

WACC = wdkd(1-T) + wc ks ks is the cost of common equity; kd is cost of debt Cost of Debt: In this case, k can be estimated by dividing the annual interest expense by the companys total debt ( long term debt + current maturities of LTD) Cost of equity: CAPM: ks = kRF + (kM kRF) or DCF: ks = D1 / P0 + g

3. Market (multiples approach)

Use the financial information in Exhibit 7b to compute the following three trading multiples for comparable companies: 1. Sales multiple= Total Enterprise value/ Sales Notes: Total Enterprise (firm) value = market value of equity+ total debt Enterprise value= Total enterprise value- cash

2. EBITDA multiple= Total Enterprise value/ EBITDA

For exhibit 6b, EBITDA (this case)= (Operating income after Depreciation) + Depreciation and Amortization (both Tangibles and Intangibles)

3. EBIAT multiple= Total Enterprise value/ EBIAT

For exhibit 6b, EBIAT (this case) = (Operating income after depreciation)x(1- tax rate)

4. Discount for lack of control and marketability

Class discussion This part is important to private companies and will be a critical component of your report What do the minority shareholders want? Why are they bothering Herbert Kohler? Discuss in your report the benefits and costs of keeping a company like Kohler under private ownership

Control Premiums and Minority discounts

Is it one share worth the same price to Herbert Kohler compared to any minority investors? Why? DCF approach yields a value per share on a control basis Multiples approach yields a value per share on a minority basis What discount to use for lack of control? Acquisition premium: 30% to 50% Voting premium: 5% to 15%

Discounts for lack of marketability (or liquidity)

Why liquidity is important? The discounts range from 15% to 35%