Interco Case Study

2420 Words Nov 23rd, 2010 10 Pages
Interco | | | | | | | |

Formerly a footwear manufacturing company, Interco developed into a diversified company that comprised subsidiary corporations in four major business areas: apparel manufacturing, general retail merchandising, footwear manufacturing and retailing, and furniture and home furnishings. Due to the fact that Interco 's subsidiaries operated as autonomous units and lacked integration between its operating divisions, the company is particularly vulnerable to a highly leveraged takeover, as far as the management concerned.
The strategic repositioning program starting in 1984 resulted in a reversal of the sales mix of Interco, with sum of footwear and furniture groups’ sales surpassing that of
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Thus the cost of capital can be easily calculated using the weighted average cost of capital formula (13.69%).
2. The process of profit margin. Given the profit margin range of 9.2% to 10.1% between the following ten years from 1989 to 1998, it is acceptable to assume that the margin rate was uniformly continuous with a 0.1% increase from year to year.
3. Both sales growth rate and working investment percentage used in the analysis are the averaged values of Interco’s four business segments.
Taking all other assumptions in Case’s exhibit 12, the DCF model shows that the reasonable share price range with a discount rate of 13.69% and the terminal value multiples changing from 14x to 16x should be $62~67(see table below). Relaxing the cost of capital value from 12% to 14%, the range of acceptable stock price then becomes $$61~77, which is close to Wasserstein, Perella& Co.’s suggestion. | Terminal Value Multiple | Cost of Capital | 14x | 15x | 16x | 10% | 83 | 86 | 90 | 11% | 76 | 80 | 83 | 12% | 71 | 74 | 77 | 13% | 66 | 68 | 71 | 13.70% | 62 | 65 | 67 | 14% | 61 | 63 | 66 | 15% | 57 | 59 | 61 | 16% | 53 | 55 | 57 |

The calculation mentioned above shows some assumptions of WPC when they valuate the stock range of Interco. However, some assumptions should be questioned:
(1) Segments VS Integrity
The WPC uses total sales in 1988, average growth rate and average increase

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