1. Why does Herbert Kohler want to do the recap? Why does he want to buy the minority shareholders out when he already controls about 90% of the company?
2. What do the minority shareholders want? Why are they bothering Herbert Kohler?
3. What is the total enterprise value of Kohler Co. using a discounted cash flow approach? What is the enterprise value using a multiples approach? What is the value of a share held by a minority shareholder in Kohler Co. that is implied by your valuations?
4. What assumptions can you use to arrive approximately at the share price of $55,400 that was estimated by Kohler Co.? Show how these assumptions can impact your valuation.
5. What assumptions can you use to arrive approximately at the share price of $273,000 that was estimated by dissenting shareholders? Show how these assumptions impact your valuation.
6. What is the maximum share price at which Herbert Kohler should be willing to settle with the dissenting shareholders in order to stop the trial on April 11,2000? Assume that (i) if the trial proceeds, it is expected to last less than a month and to result in one of two possible outcomes in terms of the price per share established in court: the $273,000 being claimed by the plaintiffs, or the $55,400 being defended by Herbert Kohler; (ii) Kohler estimates the probabilities of these two outcomes at 30% and 70%, respectively.
7. How would your answer to the previous question change if you also assume that (i) the inheritance tax owed on Frederic Kohler's estate was 50.2% of his holdings in Kohler Co. (equivalent to 489 shares out of the 975 he owned); (ii) the taxes paid by the estate amounted to $27 million (489 shares at $55,400 each), (iii) were the settlement or the trial to result in a revised share price in excess of $55,400, the IRS would likely demand a similar valuation for its claim on Frederic's estate; and (iv) Herbert Kohler estimates the probability of the IRS's demand at 100% if he goes to trial and 50% if he settles. For the last two questions, assume legal fees can be ignored and Herbert Kohler, the dissenters and the IRS all have the same cost of capital. Assume any interest charges are offset by the value for Herbert Kohler of paying late.