Case Study Questions -
1) Estimate Green Earth's valuation for Charlotte Mill
a) Estimate separately each of the components of the relevant WACC for the valuation, and the WACC itself. State explicitly the assumptions you are making, and why you are making them. Assume that the market risk premium is 7%.
b) Estimate carefully the value of the Charlotte mill to GreenEarth. From a financial standpoint, at which price would the purchase be a value-making proposition for GreenEarth?
c) Would your estimate of the value of Charlotte Mill increase or decrease if GreenEarth were allowed to step up the tax basis of the mill to reflect the purchase price. Assume that everything else (i.e., EBITDA, CapEx, and working capital) stays the same; only the depreciation goes up. (No calculations needed - conceptual answer only).
d) What would be the transaction price suggested by Stone Corporation's recent comparable transaction?
2) Determine the strategic reasons for the transaction
Does it make strategic sense for GreenEarth to acquire the mill from Wickes? Should GreenEarth bid its full valuation of the mill or some price below that? Do you expect GreenEarth to be the high bidder? As a shareholder of GreenEarth, couldn't you diversify your investment just as well as by buying a company that specialized in offset coated paper?
3) Advise on the financing of the deal
Independent of whatever valuation you calculated, for these next questions assume a purchase price of $1.6 billion.
a) How should GreenEarth finance the purchase given the financing alternatives described in the case? How does your decision affect the capital structure and other financial policies of the firm? Explain the argument behind your recommendation in detail.
b) Wickes offers to sell the mill but wants GreenEarth to accept their existing mortgage debt on the facilities as part of the transaction. The mortgage debt is approximately $500 million and carries an average interest rate of 10% over 20 years. Does this change our decision to acquire the assets? Does it change the price we offer? Does it change our financing decision?
Attachment:- Case Study.rar