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Case study: Kohler Co.

Private Company Valuation
HBS Case

Discount for lack of control and marketability 6. Valuation: Income approach (DCF) 4. Valuation: Market approach (Multiples) 5. Valuation summary (intrinsic value per share) . Case summary 2. Methodology 1. Ratio Analysis 3.

by finding the PV of the firm’s future Free Cash Flows (FCFs). Income approach • Apply the corporate value model • Find the market value (MV) of the firm (assets).Change in Operating Working Capital – Purchase of Property. Plant and Equipment .Change in Operating Working Capital – Capital expenditures • Free Cash Flow to the firm (this case): (Operating income after depr. 2.)x(1- T) + Depreciation and amortization (tangible and intangible) . • Divide MV of common stock by the number of shares outstanding to get intrinsic stock price (value). • Free Cash Flow to the firm: EBITx(1-T) + Depreciation . • Don’t forget the terminal value (use constant growth model) • Subtract MV of firm’s total liabilities to get MV of common stock.

Cost of capital (WACC) WACC = wdkd(1-T) + wc ks • ks is the cost of common equity. kd is cost of debt Cost of Debt: • In this case. k can be estimated by dividing the annual interest expense by the company’s total debt ( long term debt + current maturities of LTD) Cost of equity: • CAPM: ks = kRF + (kM – kRF) β or • DCF: ks = D1 / P0 + g .

3. Sales multiple= Total Enterprise value/ Sales Notes: Total Enterprise (firm) value = market value of equity+ total debt Enterprise value= Total enterprise . Market (multiples approach) • Use the financial information in Exhibit 7b to compute the following three trading multiples for comparable companies: 1.

2. EBIAT multiple= Total Enterprise value/ EBIAT For exhibit 6b. EBITDA multiple= Total Enterprise value/ EBITDA For exhibit 6b. EBITDA (this case)= (Operating income after Depreciation) + Depreciation and Amortization (both Tangibles and Intangibles) rate) . EBIAT (this case) = (Operating income after depreciation)x(1.

4. Discount for lack of control and marketability • Class discussion • This part is important to private companies and will be a critical component of your report • What do the minority shareholders want? Why are they bothering Herbert Kohler? • Discuss in your report the benefits and costs of keeping a company like Kohler under private ownership .

Control Premiums and Minority discounts • Is it one share worth the same price to Herbert Kohler compared to any minority investors? Why? • DCF approach yields a value per share on a control basis • Multiples approach yields a value per share on a minority basis • What discount to use for lack of control? • Acquisition premium: 30% to 50% • Voting premium: 5% to 15% .

Discounts for lack of marketability (or liquidity) • Why liquidity is important? • The discounts range from 15% to 35% .