3. (20 pts.) Maxwell Mining Products has three divisions. One makes heavy equipment for deep mining of gold, copper, and other minerals. A second division makes masks and other protective equipment for miners. A third operates three platinum mines in Canada. The company has 10 million shares outstanding, and $53 million in equity on the balance sheet. Assets total $158 million The company has been contemplating whether they could enhance valuation by dividing into two or more separate entities, since each of the divisions runs completely separately from the others. Initially, the company considered issuing tracking stock for its mining division, because they felt there was value there that was not reflected in the company's stock price of $14 per share. Then the suggestion of doing a full spin-off of the division became a topic of conversation. The thought of doing an equity carve-out also surfaced. The company as a whole earned $77 million in 2019, most of which came from the heavy equipment production division. The masks and protective equipment division lost $14 million, and the mining operations reported a profit of $22 million. Typically, a healthy platinum mining company sells at a P/E multiple of 20 in today's market, and the company believes that their division is at least as strong as those competitors. The typical P/E ratio for heavy equipment makers in the mining sector is 9x earnings, and companies that make protective equipment and masks often can be found selling at market prices across a wide range, from 5 times earnings to 25 times earnings, depending upon their prospects for growth. It is unclear whether the protective equipment division will be able to maintain profitability after the end of the Covid-19 pandemic and the increased sales to hospitals. After shifting a great deal of the mask and protective equipment division's attention to making masks for hospital use, the company received an unsolicited offer to buy the mask and protective equipment division for $67 million from a Saudi investor. While this division has not been profitable over the past 15 years, it represents a significant portion of the company's history and heritage. Selling it off to a foreign buyer would likely disappoint the elderly retired founder, Matt Eckstrom, who started the company focusing on that market back in 1938, at the end of the Great Depression. Others in the division are hopeful that the new market will lead to continued profitability for the troubled division, but at present it is unclear. The company has also considered issuing new shares or floating a new bond issue to raise capital amidst an uncertain economy. However, the company's access to capital through this means appears to be limited. Since the mines are operating with increased costs due to social distancing guidelines, banks and investors have proven less willing to commit new funds at this time. Moreover, while the masks subsidiary reported a profit of $2 million in the first quarter of 2020- its first profit in decades - the company as a whole barely broke even for the period, reporting a profit of only $0.07 per share. The company is confident that the heavy equipment business will be booming again in the 3rd and 4th quarter and bring the division's annual profits to the same levels as last year. The profits of the mining division are harder to predict, since mining profits tend to fluctuate widely based upon the price of the minerals. The market for new share issues appears to have dried up, and the best price the company found for a private placement bond issue required a 15% interest rate, which seemed too steep to management. What should the company do to increase value? Will a spin-off or issuing tracking stock help? Will an equity carve-out be better? Should the company just continue as it is? Or should the company pursue some other strategy or combination of strategies? Explain your answer, and demonstrate how EPS projections and valuations might change under different strategies. 3. (20 pts.) Maxwell Mining Products has three divisions. One makes heavy equipment for deep mining of gold, copper, and other minerals. A second division makes masks and other protective equipment for miners. A third operates three platinum mines in Canada. The company has 10 million shares outstanding, and $53 million in equity on the balance sheet. Assets total $158 million The company has been contemplating whether they could enhance valuation by dividing into two or more separate entities, since each of the divisions runs completely separately from the others. Initially, the company considered issuing tracking stock for its mining division, because they felt there was value there that was not reflected in the company's stock price of $14 per share. Then the suggestion of doing a full spin-off of the division became a topic of conversation. The thought of doing an equity carve-out also surfaced. The company as a whole earned $77 million in 2019, most of which came from the heavy equipment production division. The masks and protective equipment division lost $14 million, and the mining operations reported a profit of $22 million. Typically, a healthy platinum mining company sells at a P/E multiple of 20 in today's market, and the company believes that their division is at least as strong as those competitors. The typical P/E ratio for heavy equipment makers in the mining sector is 9x earnings, and companies that make protective equipment and masks often can be found selling at market prices across a wide range, from 5 times earnings to 25 times earnings, depending upon their prospects for growth. It is unclear whether the protective equipment division will be able to maintain profitability after the end of the Covid-19 pandemic and the increased sales to hospitals. After shifting a great deal of the mask and protective equipment division's attention to making masks for hospital use, the company received an unsolicited offer to buy the mask and protective equipment division for $67 million from a Saudi investor. While this division has not been profitable over the past 15 years, it represents a significant portion of the company's history and heritage. Selling it off to a foreign buyer would likely disappoint the elderly retired founder, Matt Eckstrom, who started the company focusing on that market back in 1938, at the end of the Great Depression. Others in the division are hopeful that the new market will lead to continued profitability for the troubled division, but at present it is unclear. The company has also considered issuing new shares or floating a new bond issue to raise capital amidst an uncertain economy. However, the company's access to capital through this means appears to be limited. Since the mines are operating with increased costs due to social distancing guidelines, banks and investors have proven less willing to commit new funds at this time. Moreover, while the masks subsidiary reported a profit of $2 million in the first quarter of 2020- its first profit in decades - the company as a whole barely broke even for the period, reporting a profit of only $0.07 per share. The company is confident that the heavy equipment business will be booming again in the 3rd and 4th quarter and bring the division's annual profits to the same levels as last year. The profits of the mining division are harder to predict, since mining profits tend to fluctuate widely based upon the price of the minerals. The market for new share issues appears to have dried up, and the best price the company found for a private placement bond issue required a 15% interest rate, which seemed too steep to management. What should the company do to increase value? Will a spin-off or issuing tracking stock help? Will an equity carve-out be better? Should the company just continue as it is? Or should the company pursue some other strategy or combination of strategies? Explain your answer, and demonstrate how EPS projections and valuations might change under different strategies