Q1. The nature of the opportunity and the question of brand expansion
1.1 The situation of the target firm
Positives: (1) The Ducati brand was world famous;(2) The product was great in terms of technology and quality and it had won the 1990, 1991, 1992, 1994, and 1995 World Superbike championships against strong competition;(3) Ducati’s product family was broad offering 15 models in four families based on seven different engines;(4) The company had strong manufacturing fundamentals with low fixed cost and high level of standardization of its engines.
Negatives: (1) Ducati faced severe financing problems, so it had to delay payments to some key suppliers which led to…show more content… And the WACC is calculated as follows: | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | Debt/Equity | 1.37 | 0.70 | 0.67 | 0.63 | 0.57 | 0.49 | 0.41 | 0.32 | WACC | 3.04% | 7.03% | 7.22% | 7.43% | 7.81% | 8.26% | 8.76% | 9.30% |
Second, we get the Free Cash Flow of Ducati and discount them to get the firm value: | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | FCFF | 18.09 | 53.56 | 23.72 | 47.18 | 72.32 | 68.93 | 77.47 | 83.49 | WACC | 3.04% | 7.03% | 7.22% | 7.43% | 7.81% | 8.26% | 8.76% | 9.30% | Terminal Value | 1646.30 | | | | | | | | Firm Value | 1252.21 | | | | | | | |
3.2 To figure out the price that TPG is willing to pay, we discount the Free Cash Flow to Equity using TPG’s target rate of return plus a country risk premium, 38%. | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | Required Return | 38.00% | | | | | | | | FCFE | 284.2 | 6.6 | 2.8 | -10.4 | 15.6 | 10.4 | 18.7 | 34.2 | Terminal Value | 1646.30 | | | | | | | | Equity Value | 341.98 | | | | | | | |
Based on the equity value above, we can get the price of 174.4 billion Lira.
Q4. Should Halpern consider applying a country risk premium?
