Portfolio Management

DePaul University Monmouth, Inc Case Group Members: Kevin Williams Junhong Liu Jie Zeng Qingyuan Li FALL FIN 553 Special topics in Corporate Finance Professor: Keith Howe FIN 553 Special Topics in Corporate Finance 1. If you were Mr. Vincent, executive vice president of Monmouth, Inc., would you try to gain control of Robertson Tool in May 2003? If I were the CEO of Monmouth, I would try the best to gain control of Robertson Tool. The cost of merger will probably be compensated by the proﬁts and values that created by this transaction. Moreover, Monmouth decided that there are 3 criteria that the the company being acquired should meet: 1. The industry should be one in which Monmouth could become a major player. 2.the industry should be fairly stable, with a broad market for the products and a product line of “small cket” items. 3. It was decided to acquire only leading companies in their respecve market segments. Robertson seem to be the perfect ﬁt. There are two aspects of reasons that make this deal so attractive. First are the basic competitive strengths of Robertson: 1 ） It is the largest domestic manufacture and a leader in its two main product areas; 2 ） It holds a 50% share of the $75 million market for its star products, which oﬀers a broad, high-quality line with a very strong brand name; 3 ） Its second product line has an excellent reputation for quality and holds a 9% share of the $200 million market; 4 ） Its distribution system, which is supported by heavy advertising and promotional programs, thereby has all that needed to support in the 6%- 7% annual sales growth in the industry. Second are the potential beneﬁts to be realized from this transaction: 1) The costs of goods sold can be reduced from 69% to 65%; 2) There is a substantial overlap of the sales force that established by Robertson, which will eliminate administrative expenses from 22% of sales to 19%; 3) Sales increase could be expected from Robertson’s “pulling” more Monmouth products into the industrial market and consumer market; 4) Monmouth can take advantage of Robertson’s strong European distribution system to sell its other products Monmouth, Inc. 1 FIN 553 Special Topics in Corporate Finance 2. What is the maximum price that Monmouth can aﬀord to pay, based on a discounted cash ﬂow valuation? Based on market multiples of EBIAT? Based on a discounted cash ﬂow valuation: WACC = r D ( 1 − Tc ) D V + r E E V , where D V =28%, E V =72%, Tc=40% , r E = r f + β L ( MRP ) r f =4.10% (choose 30-year U.S. Treasury Bonds from Exhibit 7); β u =0.725 (average the Quasi-Comparable Firms’ Asset Beta from Exhibit 6); β L = β u ∗( 1 + D E ) =0.725*(1+0.39) = 1.01; MRP = 6% (from Exhibit 7); r E = r f + β L ( MRP ) = 4.10 % + 1.01 ∗ 6% = 0.1015 ; r D = 6.07 % (rank Robertson Tool Co. as BBB according to the ﬁnancial statement analysis); WACC = r D ( 1 − Tc ) D V + r E E V = 6.07 % ∗ ( 1 − 40 % ) ∗ 28 % + 10.15 % ∗ 72% = 0.0833 We assume the growth rate of Working capital equal to the growth rate of sales. So we get Net Working Capital as following: 2002 2003 2004 2005 2006 2007 Sal es 55.3 58.6 62.1 65.9 69.8 69.8 Growt h Rat e of Sal es 5.97% 5.97% 6.12% 5.92% 0.00% Worki ng Capi tal 24.0 25.4 27.0 28.6 30.3 30.3 Net Worki ng Capi t al 1.4 1.5 1.6 1.7 0.0 So with Exhibit 4 and the Net Working Capital, we can get the free cash ﬂow as following: Monmouth, Inc. 2

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