A portfolio approach is proposed to estimate the cost of capital, to account for different industry types and risks of the multiple divisions. The following table presents the portfolio construction and weights proposed to estimate the cost of capital.

Kohler Group/Division Portfolio Weights

Kitchen & Bath 80%

Power System 20%

• What might be the rationale for including only two divisions in the portfolio? Use the information presented in Exhibit 4 to justify the portfolio weights.
• Use the comparable data in Exhibit 7a, determine which comparable belong to the Kitchen & Bath group and which belong to the Power System group.
• 

which sum?

Exhibit 4 Kohler Co. Income Statements 1997 by Group (in $ thousands, as of December 31) Kitchen & Bath Group Power Systems Group Interiors Group Hospitality Elim. & & R. Estate Corp. Var. Group Kohler Co. Consol. Net Sales Cost of Sales Gross Profit 1,485,831 1.045,038 440,793 540,260 461,140 79,120 145,414 92.564 52,850 50,789 43.041 7,748 (8,891) (4.398) (4,492) 2,213,403 1.637.385 576,019 Selling & Administrative Exp. Amortization of Intangibles Operating Income after Depr. 284,097 0 156,696 44,600 0 34,520 45,580 0 7,270 4,872 0 2,876 942 21.618 (27,052) 380,091 21,618 174,310 0 12 Non-operating Income (Exp.) Interest Income Interest Expense Pretax Income (6,400) 1,477 10.181 141,591 (269) 180 2,428 32,004 514 142 1.633 6,292 409 426 (1.251) (24,965) (5,746) 2,237 14,031 156,770 1.040 1,848 Income Tax Expense Net Income 54,179 87,411 11,605 20,398 2.291 4,001 727 1,121 (6) (24,957) 68.796 87,974 Source: Company documents. Exhibit 7a Descriptions of Comparable Companies Company Description American Standard Global manufacturer of air conditioning systems (60% of 1997 sales), bathroom and kitchen fixtures and fittings (24% of 1997 sales), and braking and control systems for trucks, buses and utility vehicles (16% of 1997 sales). Manufacturer of kitchen cabinets and vanities. American Woodmark Masco Largest domestic manufacturer of kitchen and bath products, including faucets (mainly under their Delta brand), cabinets, appliances, showers and tubs, and other plumbing supplies. Other home improvement and building products include ventilating equipment, water pumps, and insulation. Briggs & Stratton World's largest producer of 3-to-22 horsepower gasoline engines for outdoor power equipment, including lawn and garden equipment (81% of 1997 sales); and generators, pumps and pressure washers for industrial, agricultural and consumer applications. Leading worldwide designer and manufacturer of diesel engines, gas engines and engine components for equipment used in automotive, power generation, industrial and filtration markets around the world. Cummins Engine Detroit Diesel Manufactures and services diesel and alternative fuel engines for the automotive and power generation markets worldwide. Source: Compiled by casewriters from company documents. Exhibit 4 Kohler Co. Income Statements 1997 by Group (in $ thousands, as of December 31) Kitchen & Bath Group Power Systems Group Interiors Group Hospitality Elim. & & R. Estate Corp. Var. Group Kohler Co. Consol. Net Sales Cost of Sales Gross Profit 1,485,831 1.045,038 440,793 540,260 461,140 79,120 145,414 92.564 52,850 50,789 43.041 7,748 (8,891) (4.398) (4,492) 2,213,403 1.637.385 576,019 Selling & Administrative Exp. Amortization of Intangibles Operating Income after Depr. 284,097 0 156,696 44,600 0 34,520 45,580 0 7,270 4,872 0 2,876 942 21.618 (27,052) 380,091 21,618 174,310 0 12 Non-operating Income (Exp.) Interest Income Interest Expense Pretax Income (6,400) 1,477 10.181 141,591 (269) 180 2,428 32,004 514 142 1.633 6,292 409 426 (1.251) (24,965) (5,746) 2,237 14,031 156,770 1.040 1,848 Income Tax Expense Net Income 54,179 87,411 11,605 20,398 2.291 4,001 727 1,121 (6) (24,957) 68.796 87,974 Source: Company documents. Exhibit 7a Descriptions of Comparable Companies Company Description American Standard Global manufacturer of air conditioning systems (60% of 1997 sales), bathroom and kitchen fixtures and fittings (24% of 1997 sales), and braking and control systems for trucks, buses and utility vehicles (16% of 1997 sales). Manufacturer of kitchen cabinets and vanities. American Woodmark Masco Largest domestic manufacturer of kitchen and bath products, including faucets (mainly under their Delta brand), cabinets, appliances, showers and tubs, and other plumbing supplies. Other home improvement and building products include ventilating equipment, water pumps, and insulation. Briggs & Stratton World's largest producer of 3-to-22 horsepower gasoline engines for outdoor power equipment, including lawn and garden equipment (81% of 1997 sales); and generators, pumps and pressure washers for industrial, agricultural and consumer applications. Leading worldwide designer and manufacturer of diesel engines, gas engines and engine components for equipment used in automotive, power generation, industrial and filtration markets around the world. Cummins Engine Detroit Diesel Manufactures and services diesel and alternative fuel engines for the automotive and power generation markets worldwide. Source: Compiled by casewriters from company documents