CASE 12: What are we really worth? |
FIN 530: FINANCIAL MANAGEMENT |
Herzog, RichardSiepmann, KristinaRauls, PascalThiel, Philipp |
After 20 years of success and growing, Matt, the owner of Citrus Glow, had to make a decision whether to gain capital by going public or not. He knew that the company would need more capital if the company should further grow and expand. To make the right decision he asked his children for advice since they are all MBA graduates. Lisa and Joe strongly supported their dad’s idea to issue shares whereas Dan thought outsourcing would be the better alternative. Lisa and Joe brought the argument that this is the right way to stay competitive when competitors offer substitutes on the market. His son Dan was afraid that going public would lead to a loss of control.
After thinking about the alternatives and the arguments his children made, he decided that going public would be the better idea. The reason was that the competitive advantage of the firm depended on their product quality. Matt was concerned that with outsourcing the product quality might suffer.
To prepare the IPO he wanted the children to figure out how much the company is really worth. Lisa, Joe, and Dan used different approaches to estimate the value. Lisa preferred the Corporate Value Model based on discounted free-cash flows. Dan in contrast chose the price-ratio model, which involved various ratios like price-earnings and price-sales ratio, to estimate the value. For his forecast he used the 4-year average compounded growth rate. Another approach was used by Joe. He estimated the common stock value via variable growth rate model. Therefore he used a realistic required rate of return, various growth rate scenarios, as well as industry benchmarks, in order to value growth companies.
Lisa assumed that their different approaches might lead to various amounts of value. For this case they planned to evaluate their used inputs....