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Transcript of Monmouth Inc
Leading producer of engines and compressors
Main consumers and clients were oil and gas industries; volatile market
Sought stable firm to include into portfolio
New aggressive acquisition strategy
Prior Acquisition/merger options
World largest manufacture of Rules and tapes
good distributions system
quality product line
World leading supplier of soldering tools in Industrial, electronic, and consumer markets
Provided Monmouth a new high quality product line
Under performing- projected 2% growth
Potential for growth
Fairly stable industry with a broad product line- “small ticket items”
Independent from consumer usage
leading company in their respective market
Distribution of 2,100 wholesalers extending to 15,000 retail outlets
Largest domestic manufacturer of cutting edge hand tools
From Exhibit 4, we used the P/E and EBIAT multiple to value the equity of Robertson from a comparable approach:
Avg P/E multiple of the comparisons was 13.5 at the end of 2002, RTC’s own P/E matched identically with the 13.5 ratio.
EBIT of 3M - Int .8M = EBT of 2.2 - Tax 40% = EAT of 1.32M x Avg PE of 13.5
= 17.82M Equity at the end of 2002.
Debt is $12 Million.
Equity is shares x current market price= $44 x 584,000 shares= $25,696,000 market cap
**BV of share price was $53 but market value was $44**
Value of Firm= $12M Debt+ $25,686,000 Mkt Cap= $37,696,000
D/E = 46.7%
Avg Levered equity beta from the comps= .958
Avg Debt/equity of comps= 33.35%
UnLevered equity beta= LB .958 / (1 + (1 - 40%) x comp D/E 33.35%= .798 ULB
Levered beta= ULB .798 x [1 + (1 - 40%) x firm D/E 46.7%] = 1.02
Cost of equity= RF 4.10% + 1.02 LB (5.5% MRP) = 9.72%
After tax Cost of Debt = BBB bond rate of 6.07% x (1 - 40%)= 3.64%
Robertson Capital Structure
**I multiplied the debt/capital ratio of each comp’s firm value to get the debt then minus that from the firm value to get the equity. Took avg of the 6 comps**
WACC = 9.72% x (E/V 68.17%) + 3.64% x (D/V 31.83%)= 7.78% for Robertson
Avg EBIAT multiple of comparisons at the end of 2002 was 12.85 compared to RTC’s 16.1
RTC’s EBIAT of 1.8M x Avg EBIAT of 12.85 = 23.13M - 12M Debt= 11.13M Equity at the end of 2002
(EBIT(1-T) + Depreciation - CAPEX to get FCF for the years 2003 to 2007. Then it’s: FCF - 12*6.07% (interest on LTD) + 12*6.07%*40% (the tax shield) to get FCFE for 2003 to 2007.
Finally, discount it back at the cost of equity (9.72%).
( See Table #1 for our FCFE)
I discounted with the cost of equity. 6% is the industry average growth rate mentioned in the case.