Case study: Kohler Co.

Private Company Valuation

HBS Case
 Methodology
1. Case summary
2. Ratio Analysis
3. Valuation: Income approach (DCF)
4. Valuation: Market approach (Multiples)
5. Discount for lack of control and
marketability
6. 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).
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(1-
T) + 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%