Prince S.A. Case

654 Words Jan 24th, 2013 3 Pages
Problem 1:
Question: What is the economic rationale of the venture? Prince Geographic location Located in Mediterranean region, attractive to Jersey because of manageable source of goods Preferential investment policies in Tunisia:  Unrestricted remittance of dividends  Capital repatriation in case of liquidation  Modified regulation to avoid double taxation of dividends Jersey Headquartered in UK, access to the European market for garments Jersey had multi-national manufacturing and sourcing experiences, great opportunity for Prince to lower its business risk through diversification Jersey can provide:  state-of-the art fabric technology  recognized design competence  well established brand

Investment opportunity

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3.1 Valuation
Valuation calculations are the attached tables (Appendix 1 and 2).Assumptions made: Assumed rates of period 1985-1991: Inflation rate of Tunisa (assumed) Subsidized interest rate Tunisia (assumed) Opportunity cost of capital for Prince (%) Corporate income tax rate Tunisia (%) Corporate income tax rate UK (%) Jersey D/E ratio(assumed) 8.50% 8.50% 25% 43.80% 35.00% 13.3% Inflation rate of UK Spot exchange rate JERSEY Beta UK Market risk premiun Riskfree rate UKCorporate Long Term Borrowing Rate 5% 1.009 1.34 7% 9.6% 9.9%

Residual value: Assume the growth of the business after 1991 will become a nominal growth, i.e. growth rate of FCF equals to inflation rate Calculation of Jersey’s cost of capital: Levered COC: Unlevered COC: ( ( ( ) ) ( ( ) ) ) ( )


3.2 Pricing
There is a great chance that the deal would take place. Even though the cash flows from the Joint Venture will be roughly the same for both Jersey and Prince, except for the assistance fee, the fact that they are subject to different Cost of Capital leads to a big difference in their valuation for the joint venture. As Prince is a family-owned company, Mr. Nakit’s cost of capital is significantly higher than that of Jersey, which is a well-diversified company, which means the 50% of the joint venture would be worth more for Jersey than for Prince. After our valuation, we think Prince will accept for anything above 3.105 million dinars. And Jersey would be willing to pay