Kohler Case Study Essay

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Kohler Case Study I. Enterprise Value of Kohler Tax Rate = 34% Debt to Value = .464 or 681,038/1,467,373 Debt to Equity = .536 or 786,335/1,467,373 Risk Free Rate = 20 yr government bond = 6.0% Market Return on Debt = 6% Market Return on Equity = 2002 Net income/ Average Stockholder’s equity 1998-2002 108,229/924,800= 11.7% WACC: (1-.34)*(.06)*(.464)+ (.117)*(.536)= 8.11% II. Estimated Share Price of Kohler - \$55,400 vs. \$270,000 The \$55,400 price per share is an undervalued figure because it is presuming that Kohler will remain a private company in the future with the same ownership structure that it presently maintains. After analyzing the projected balance sheets, projected income statements, and projected…show more content…
The share price of \$270,000 was significantly higher because the “fair value” as perceived by the dissenters, which accounted for the chance of an IPO. Taking into account the recently traded Kohler Co. share prices, the book value of a share, and the possibility of an IPO greatly inflated what the perceived value of each share should be. While Kohler believed their voting control and ownership structure would remain the same, the shareholders believed otherwise. Because shareholders assumed Kohler would go public, they argued for a higher valuation so as to receive the highest price, and thus profit, in the buyout. So based on the highest MVE, we picked Masco as the comparable firm of choice. Using Masco’s MVE, \$9838.8, and LTM EBIAT, \$437.3, we solved for Masco’s P/E ratio, which was equal to 22.5. By multiplying the P/E ratio by Kohler’s LTM EBIAT (22.5 * \$93.76), we projected a market value of \$2,109,610,000. To solve for estimated share price, we divided the projected market value by 7,587.89, the number of shares outstanding to obtain an estimated share price of \$278,023.47. This estimate is near the \$270,000 per share offer price. III. Maximum Share Price For Settlement The maximum share price, if Herbert Kohler is willing to settle with the dissenting shareholders to stop the trail on April 11, 2000, is \$120,680. Given the probability of the two outcomes, the expected price for \$273,000 per share claim (probability 30%) was \$81,900 and the