Date: Tuesday, April 24, 2007
Case: Superior Industries International (UVA-F-0955)
Read:
1. A Comparison of the Weighted-Average Cost of Capital and Equity-Residual Approaches to Valuation (UVA-F-1301)
2. Using the Equity Residual Approach to Valuation: An Example (UVA-F-1267)
Network File: Superior.xls; Fig4.xls
Assignment:
In reading F-1267, focus on the first 4 pages (through middle of page 4).
1. Using the WACC approach, what is the estimated value per share of Superior? Can you identify any potential synergies?
2. For simplicity assume that Superior planned to maintain its debt at a constant dollar value of $44.7 million over the planning horizon shown in Exhibit 8 of the case. Estimate the value of Superior using the Equity Residual approach assuming the cost of equity you used in question 1 and this debt assumption. Why are the values derived in #1 and #2 different?
3. Now assume that debt grows from $44.7 million to $60 million in 1996 according to the schedule given below. Using the equity residual approach, re-estimate the value of Superior. Compare your new value estimate to the values in #1 and #2 and be prepared to explain the pattern you observe. (Note: Your estimate must reflect the interest costs due to the additional debt as well as the effects of any proceeds from issuing the debt.)
| Year | 1989 | 1990 | 1991 | 1992 | 1993 | 1994 | 1995 | 1996 |
| Debt
($ mill.) |
$44.7 | $43 | $42 | $50 | $52 | $54 | $56 | $60 |
(For purposes of your analysis initially assume the same cost of equity you used earlier.)
4. When you use the WACC, you are implicitly assuming that the firm is maintaining the same debt to capital ratio (in market value terms). For the years 1986 through 1996, what levels of debt are implied by the WACC of 13.60% and the assumptions used in Exhibit 6 in the case?
Hint: See the last couple of pages of F-1267. The market value (enterprise) of the firm at a point in time is the present value of future cash flows yet to be received. For example, if you had a cash flow of $100 a year for the next 3 years plus a terminal enterprise value of $300, the current market value of the enterprise would be (at WACC of 13.60%):
The market value at times 1 and 2 would be calculated as follows based on the then remaining cash flows.
5. Using the debt schedule developed above, what is your estimate of the value share of Superior using the Equity Residual (ER) approach?