Sterling Household Products Company

In order to obtain growth estimates for each year from 2003 to 2012, the data given in Exhibit 1 and Exhibit 6 of the case was used. The growth rate (%) was calculated by looking at the change in revenue from one year to the next starting with year

Two main risks need to be considered with this acquisition. The first risk is the contingent liabilities arising from Elson’s compensation and accumulated earnings from PTI’s interest-earning assets. Lane should provide the bank information on the accountant’s opinion on these contingent liabilities as rationale the bank’s valuation needs to discount them from their asking price.

i. EBITDA forecasts: use values given from Exhibit 8. However, I expect you to briefly comment on the “reasonableness” of those forecasts (especially given past performance and efficiency of the company’s operations), and possibly provide a simple analysis of the sensitivity of your EBITDA growth assumptions to the value of OLC.

The asset will generate end-of-year cash flows of $100/year for the first two years. With the interest rate 10%/year, the present value of the firm’s future cash flow is $173.55, which is known as the capital asset and shareholder’s equity.

Using the other data provided in Exhibit 1 of the case study, we can calculate the Un-Levered Free Cash Flow for ATC during the period 2008-2012 as shown in the above table.

1. Your wealthy aunt just established a trust fund for you that will accumulate to a total of $100,000 in 12 years. Interest on the trust fund is compounded annually at an 8% rate. How much is in your trust fund today?

If $100 is placed in an account that earns a nominal 4 percent, compounded quarterly, what will it be worth in 5 years?

i. EBITDA forecasts: use values given from Exhibit 8. However, I expect you to briefly comment on the “reasonableness” of those forecasts (especially given past performance and efficiency of the company’s operations), and possibly provide a simple analysis of the sensitivity of your EBITDA growth assumptions to the value of OLC.

Q1- Define the terms operating and financial leverage as well as business and financial risk. Identify some factors that affect each of them and how they combine to affect the firm’s investment risk.

We estimate the terminal value growth rate to be at -2%; we make this assumption by taking the average of the industry’s annual decline growth rate between 1% and 3%. The free cash flows for 2002-2006 are taken from the company’s Financial Forecast; and, to calculate the terminal year’s free cash flows, we grow it by -2% and divide it by the difference between the WACC and the long term growth rate. Since August 1st is our evaluation date, there is still 5 months left for 2002, the cash flow to be received for 2002 is calculated by taking the total cash flow times 5/12, and for the remaining years, the cash flow to be received is equal to the total cash flows. And, finally, for the midyear factor ,we also take same caution that t are 5 months left to receive cash flows, and payments are made semiannually . Thus, our mid-year factor for 2002 is 5 over 24, and (5+6) over 12 for 2003, and for the remaining years we add 1 to the prior year’s midyear factor.

The PV of each of the cash flows calculated by multiplying the cash flow with the present value column.

Find the present values of the following cash flow streams. The appropriate interest rate is 8%.

=FV(rate, nper, pmt, pv, type) returns the future value of a series of cash flows.

For this equation, I used Excel to calculate the NPV. The formula for NPV is to take the future cash flow and discount it back as follow:

We wish to compute the present value. The present value is the dollar amount which, if invested at r percent compounded annually, would grow to an amount C after n years.