University Strategic Management Assignment: Cost of Capital Analysis

This assignment provides a detailed financial analysis of two companies, Columbia Sportswear and The Walt Disney Company, as part of a strategic management course. The solution encompasses the calculation of the Weighted Average Cost of Capital (WACC) using both market value and net debt considerations, along with the application of the Capital Asset Pricing Model (CAPM) to determine the cost of equity. The assignment also includes valuation using Discounted Cash Flow (DCF) and Adjusted Present Value (APV) methods to determine the maximum price per share in an acquisition scenario. The assignment also covers the calculation of free cash flow, terminal value using both the APV and WACC methods, and the value of a levered target firm using both APV and WACC methods. The calculations are thoroughly presented, demonstrating a strong understanding of financial modeling and valuation techniques. The assignment meets the requirements of the MGT 339 course at the university level, and addresses core concepts in strategic management and corporate finance, including the cost of capital and valuation in the context of mergers and acquisitions.

Running head: STRATEGIC MANAGEMENT
Strategic Mangement
\
Name of the Student:
Name of the University:

STRATEGIC MANAGEMENT 2| P a g e
Table of Contents
Question 1…………………………………………………………………………………….…………3
Question 2……………………………………………………………………………………………….8
Solution to Q1
Company 1 - Columbia Sportswear Company

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1. Risk Free Rate (Rf) = 1.734%
2. Market Value of Equity = 6.85 Billion
Enterprise Value = 6.69 Billion
Cash = 524.35 Million
Beta = 0.68
3. Yield to Maturity (Bonds) (Kd) = 1.74%
4. Weights for Equity & Debt based on Market Value:
Equity = 6.85 Billion
Debt = 0.40587 Billion
Weight of Equity (We)= 6.85/6.85+.40587
= 0.944
Weight of Bonds (Wd)= 0.056
5. Company’s Cost of Equity using CAPM:
Risk free rate (Rf) = 1.734%
Market Risk Premium = 5%
Beta = 0.68
Cost of Equity (Ke) = Rf + (Rm – Rf) * Beta
= 1.734% + 5% * 0.68

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= 5.134%
6. Effective (after tax) Cost of debt capital:
Cost of Debt (after tax) = Kd (1-t)
= 1.74 (1 - .35)
= 1.131%
7. Company’s Weighted Average Cost of capital (WACC):
As calculated above:
Cost of Equity (Ke) = 5.134%
Cost of Debt (after tax) (Kd) = 1.131%
Weight of Equity (We) = 0.944
Weight of Debt (Wd) = 0.056
Weighted Average Cost of Capital (WACC) = Ke * We + Kd * Wd
= (5.134 * 0.944) + (1.131*0.056)
= 4.91%
8. Revised Weighted Average Cost of Capital (WACC) considering Net Debt:
Net Debt = Enterprise Value – Value of Equity
= 6.69 – 6.85
= -0.16 Billion
Revised Weights:
We = 6.85 / 6.85 – 0.16

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= 1.024
Wd = - 0.16 / 6.85 – 0.16
= - 0.024
Revised WACC = Ke * We + Kd * Wd
= (5.134 * 1.024) + (1.131* - 0.024)
= 5.23%
It changes from 4.91% to 5.23% i.e increase in WACC is by 0.32%. .
9. The Value calculated in 7 above has been derived from the values collected via the
information as stated in the question from the given source.
For the calculation of WACC using the market Value of Equity & Debt, all the values
except the Cost of debt were absolutely given in the source website. Hence the Cost of Debt
(Yield to maturity for Bonds) has been taken via a reference and assumed to be 1.74%
Further, for calculation the value for No. 8, since the value of Marketable Securities were
not given, the Value of Net Debt has been arrived by subtracting Value of Equity from
Enterprise value and the same assumption has been taken for Cost of Debt (Yield to
Maturity for Bonds) as in 7 above.
Company 2 – The Walt Disney Company
1. Risk Free Rate (Rf) = 1.734%
2. Market Value of Equity = 249.54 Billion

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Enterprise Value = 317.39 Billion
Cash = 10.11 billion
Beta = 0.72
3. Yield to Maturity (Bonds) (Kd) = 1.74%
4. Weights for Equity & Debt based on Market Value:
Equity = 249.54 Billion
Debt = 56.96 Billion
Weight of Equity (We)= 249.54/249.54+56.96
= 0.814
Weight of Bonds (Wd)= 56.96/249.54+56.96
= 0.186
5. Company’s Cost of Equity using CAPM:
Risk free rate (Rf) = 1.734%
Market Risk Premium = 5%
Beta = 0.72
Cost of Equity (Ke) = Rf + (Rm – Rf) * Beta
= 1.734% + 5% * 0.72
= 5.334%
6. Effective (after tax) Cost of debt capital:

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Cost of Debt (after tax) = Kd (1-t)
= 1.74 (1 - .35)
= 1.131%
7. Company’s Weighted Average Cost of capital (WACC):
As calculated above:
Cost of Equity (Ke) = 5.334%
Cost of Debt (after tax) (Kd) = 1.131%
Weight of Equity (We) = 0.814
Weight of Debt (Wd) = 0.186
Weighted Average Cost of Capital (WACC) = Ke * We + Kd * Wd
= (5.334 * 0.814) + (1.131*0.186)
= 4.55%
8. Revised Weighted Average Cost of Capital (WACC) considering Net Debt:
Net Debt = Total Debt - Cash
= 56.96 – 10.11
= 46.85 Billion
Revised Weights:
We = 249.54 / 249.54+46.85
= 0.842
Wd = 46.85 / 249.54+46.85

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= 0.158
Revised WACC = Ke * We + Kd * Wd
= (5.334 * 0.842) + (1.131* 0.158)
= 4.67%
It changes from 4.55% to 4.67% i.e increase in WACC is by 0.12%.
9. The Value calculated in 7 above has been derived from the values collected via the
information as stated in the question from the given source.
For the calculation of WACC using the market Value of Equity & Debt, all the values
except the Cost of debt were absolutely given in the source website. Hence the Cost of Debt
(Yield to maturity for Bonds) has been taken via a reference and assumed to be 1.74%
(same as for Columbia Sportswear Company)
Further, for calculating the value of No. 8, since the value of Marketable Securities were not
given, the Value of Net Debt has been arrived by subtracting Cash Value from the Value of
Total Debt and the same assumption has been taken for Cost of Debt (Yield to Maturity for
Bonds) as in 7 above.
Solution to Q2.
1.1 The Maximum Price per share that the acquirer can pay:

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DCF Method
Max Price per share = Value of Equity
No. of Shares
= $6,202.27
200
$ 31.01 per share
APV Method
Max Price per share = Value of Equity
No. of Shares
= $ 6295.87 + $ 2069.44
200
= $ 41.83 per share
2.a)

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a Cost of Unlevered Equity Return (Ke) =
Rf + (Rm-Rf) *
Beta
= 3 + (5 * 1.15)
= 8.75%
b Cost of Levered Equity Return (Ke) =
Rf + (Rm-Rf) *
Beta
= 3 + (5 * 1.38)
= 9.90%
Working Note:1
Calculation of Beta of Levered Firm:
BL
= Bul (1 + D (1-t) /E)
1.15 (1 + .25 (1-.40) / .75)
1.15 ( 1 + .15/.75)
1.15 ( 1+.20)
1.38
c Weighted Average Cost of Capital = Ke * E/V + kd * D/V
Given,
Cost of Debt (Kd) 8.00%
Value of Equity $ 3,500.00 thousand
Value of Debt $ 450.00 thousand
Cost of Equity (Ke) (As calculated above) 9.90%
Weighted Average Cost of Capital
(Kc) = Ke * E/(D+E) + kd (1-t) * D/(D+E)
9.9 * 3500/3950 + 8 (1-.40) * 450/3950
9.32%

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d Free Cash flow for years 2020-2024
(Amt. in $ (in thousands)
Particulars 2020 2021 2022 2023 2024
EBIDTA $
581.80
$
715.80
$
746.00
$
861.80
$
935.80
Less: Interest $
(36.00)
$
(36.00)
$
(36.00)
$
(36.00)
$
(36.00)
Less: Depreciation $
(175.00)
$
(180.30)
$
(185.70)
$
(191.20)
$
(197.00)
EBT $
370.80
$
499.50
$
524.30
$
634.60
$
702.80
Less: Tax @ 40% $
(148.32)
$
(199.80)
$
(209.72)
$
(253.84)
$
(281.12)
EAT $
222.48
$
299.70
$
314.58
$
380.76
$
421.68
Less: Capital Expenditure $
(500.00)
$
(350.00)
$
(200.00)
$
(180.00)
$
(150.00)
Less: Increase in NWC $
(50.00)
$
(60.00)
$
(65.00)
$
(70.00)
$
(75.00)
Add: Depreciation $
175.00
$
180.30
$
185.70
$
191.20
$
197.00
Free Cash Flow $
(152.52)
$
70.00
$
235.28
$
321.96
$
393.68
Note:
The Interest amt. is not given, so the rate of 8% is applied on $450 thousands (market value of debt) given in
the question.
e Terminal Value in 2024:
1 APV Method
Free Cash Flow in the year 2024 on the assumption that entire capital is equity
financed
Particulars 2024
EBIDTA
$
935.80
Less: Depreciation
$
(197.00)
EBT
$
738.80
Less: Tax @ 40% $

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(295.52)
EAT
$
443.28
Less: Capital Expenditure
$
(150.00)
Less: Increase in NWC
$
(75.00)
Add: Depreciation
$
197.00
Free Cash Flow from Equity
$
415.28 thousands
g 3%
Ke 8.75%
Therefore, Terminal Value = Unlevered Terminal Value + Tax Shield in Terminal
Value
= $ 7438.93 + $ 1115.84 thousands
= $ 8,554.77 thousands
Working Note:2
Unlevered Terminal Value = FCFF + (1+g)
kc - g
= 415.28 * ( 1 + .03)
(.0875 - .03)
=
$ 427.74
0.0575
= $ 7,438.93 thousands
Terminal value at target debt = FCFF + (1+g)
kc - g
= 415.28 * ( 1 + .03)
(.08 - .03)
=
$ 427.74
0.05
= $ 8,554.77 thousands
Tax Shield in Terminal Value $ 1,115.84 thousands
2 WACC Method