Case Study: Valuation of Ottotek Corporation by Melo Ins Corporation, an unlisted spare parts manufacturer. For this purpose the treasury team of Molo Inc, a US company engaged in the automotive industry, proposes to acquire Ortotek Molo Inc has been asked to estimate the enterprise value of Omote Corporation using the entity valuation method, based on its expected performance as a separate entity techniques and has asked that, in addition to a free cash flow valuation of the enterprise. However, the company's Chairman is not entirely comfortable with discounted cash flow the Treasury team should also estimate the equity value using the earnings valuation technique, and compare their results with the discounted cash flow estimate For valuing Ottotek Corporation, the treasury team itas been asked to use relevant data relating to five companies that are quoted on NYSE/NASDAQ are engaged in the same line of activity as Ottotel, and have debt equity is that are not hugely different from Ottotek's own gearing level. The five companies that have been identified for this purpose are BorgWarner Inc (BWA), Dana Inc (DAN), Lear Corporation (LEA). L.RO Corporation (LKQ), and Meritor Inc (MTOR) 3.82 1.6 2.09 It is now 30 September 2021. Key data from Ottotek Corporations income statements for the last three years are summarised below (USD millions) Year ended 30 September 2015 2016 2017 Sales revenue 28.43 2726 32.55 Operating profiter depreciation) 9.96 9.51 11.07 Net interest costs 270 2.75 290 Profit before tax 7.26 6.76 8.17 Taxation 2.31 202 2:20 After tax profit 4.95 4.74 5.97 Dividends 0.31 0.36 Retained earnings 4.64 438 5.54 In addition to the above the following further information has been gathered by the treasury team for the purpose of estimating the free cash flows and appropriate weighted average cost of capital for Ottotek Corporation In each of the next three years Ottotek Corporation's sales revenue is expected to increase at a rate equal to the compound annual growth rate experienced over the period shown above CARG The latest operating profit ratio will remain unchanged for the next three years. The annual capital investment required to maintain current operational levels is equivalent to the annual depreciation (accounting depreciation can be assumed to be equal to tax depreciation). However, additional working capital would need to be brought in at the start of every year for each of the next three years. The additional amount would be roughly 20% of the increase in sales revenue After the next three years, the estimated free cash flow is expected to grow in perpetuity at about 2.5% per year in real terms - inflation rate is forecast at about 12% per year Wilay Lee Te CA No be Equity Ordonary 14 inciessta Total Thea U-6 MRT Manager Program with sec Bond Ord 1 Otto Corporation pays interest an average.34% ontbrite which are expected to remain their current level of 30 min 91 US Treasury Bill with a nominal value of 51000 currently trading market price of $995 10 the yielt on US Treasury Bills is calculated with a stay cont 360 instead of 365) for a year The market is premis currently estimated at 5 pantum The corporation tax rate in USA 20%. Ottotek Corporation and Moo Inc have similar levels of art and it is intended that current levels of pearing would contine unclumped after the takeover Mojo Inc's latest balance sheet discloses the following information Summarised information from last Balance Sheet of Mole Inc USD millions Current Ass 2020 Non current 240 20 Totalsts 2650 Liabilities 14730 Equity Ordinary share Capital (par value 254) 30,00 Retained Earnin/Reunes 10 Tocal liabilities & equity 26540 The abilities of $147,30 million include debt in the form of 65% bonds maturing in 2026 with par value of $1000 per bond and a total par value of $13400 million, Mojo Ine's securities are currently trading at the following prices Bonde $947 Ordinary shares $225 Veighted contge cost of capital masliet me Required A. Perform an enterprise valuation of Ottotek Corporation using an appropriate discounted cash flow technique, and also perform an earnings valuation as requested by Mojo Inc's Chairman, compare the equity value of Ottotek corporation on the basis of the two different techniques (circa 30 marks) diddord voduction + carning valuseasive Case Study: Valuation of Ottotek Corporation by Mojo Inc Mojo Inc, a US company engaged in the automotive industry, proposes to acquire Ottotek Corporation, an unlisted spare parts manufacturer. For this purpose the treasury team of Mojo Inc has been asked to estimate the enterprise value of Ottotek Corporation using the entity valuation method, based on its expected performance as a separate entity However, the company's Chairman is not entirely comfortable with discounted cash flow techniques and has asked that, in addition to a free cash flow valuation of the enterprise the Treasury team should also estimate the equity value using the earnings valuation technique, and compare their results with the discounted cash flow estimate For valuing Ottotek Corporation, the treasury team has been asked to use relevant data relating to five companies that are quoted on NYSE/NASDAQ, are engaged in the same line of activity as Ottotek, and have debt equity ratios that are not hugely different from Ottotek's own gearing level. The five companies that have been identified for this purpose are BorgWarner Inc (BWA), Dana Inc (DAN). Lear Corporation (LEA), EKQ Corporation (LKQ), and Meritor Inc (MTOR). 2.42 1.53 1162 09 It is now 30 September 2021. Key data from Ottotek Corporation's income statements for the last three years are summarised below: (USD millions) Year ended 30 September 2015 2016 2017 Sales revenue 28.43 27.24 32.55 Operating profit (after depreciation) 9.96 9.51 11.07 Net interest costs 2.70 2.75 2.90 Profit before tax 7.26 6.76 8.17 Taxation 231 2.02 2.20 After tax profit 4.95 4.74 5.97 Dividends 0.31 0.36 0.43 Retained earnings 4.64 4.38 5.54 In addition to the above, the following further information has been gathered by the treasury team for the purpose of estimating the free cash flows and appropriate weighted average cost of capital for Ottotek Corporation: In each of the next three years Ottotek Corporation's sales revenue is expected to increase at a rate equal to the compound annual growth rate experienced over the period shown above CARG The latest operating profit ratio will remain unchanged for the next three years The annual capital investment required to maintain current operational levels is equivalent to the annual depreciation (accounting depreciation can be assumed to be equal to tax depreciation) However, additional working capital would need to be brought in at the start of every year for each of the next three years. The additional amount would be roughly 20% of the increase in sales revenue. After the next three years, the estimated free cash flow is expected to grow in perpetuilty at about 2.5% per year in real terms-inflation rate is forecast at about 1.2% per year Vijay Lee Ottotek Corporation pays interest at an average rate of 8.34% on its borrowings, which are expected to remain at their current level of USD36 million. 91-day US Treasury Bills with a nominal value of $1000 are currently trading at a market price of $995.10; the yield on US Treasury Bills is calculated with a day count of 360 (instead of 365) for a year. The market risk premium is currently estimated at 5.4% per annum. The corporation tax rate in USA is 28%. T'm-r) Ottotek Corporation and Mojo Inc have similar levels of gearing, and it is intended that current levels of gearing would continue unchanged after the takeover. Mojo Inc's latest balance sheet discloses the following information: Summarised information from last Balance Sheet of Mojo Inc USD millions Current Assets 25.20 Non-current Assets 240.20 Total assets 265.40 Liabilities 147.30 Equity - Ordinary share Capital (par value 250) 30.00 Retained Earnings/Reserves 88.10 Total liabilities & equity 265.40 The liabilities of $147.30 million include debt in the form of 6.5% bonds maturing in 2026, with par value of $1000 per bond and a total par value of $134.00 million. Mojo Inc's securities are currently trading at the following prices: Bonds: $947 market value Ordinary shares: $2.25. Required: A. Perform an enterprise valuation of Ottotek Corporation using an appropriate discounted cash flow technique, and also perform an earnings valuation as requested by Mojo Inc's Chairman; compare the equity value of Ottotek corporation on the basis of the two different techniques. (circa 30 marks) weighted average cost of capital dividend valuation & earnings saluation Searing ' Case Study: Valuation of Ottotek Corporation by Mojo Inc Mojo Inc, a US company engaged in the automotive industry, proposes to acquire Ottotek Corporation, an unlisted spare parts manufacturer. For this purpose the treasury team of Mojo Inc has been asked to estimate the enterprise value of Ottotek Corporation using the entity valuation method, based on its expected performance as a separate entity. However, the company's Chairman is not entirely comfortable with discounted cash flow techniques and has asked that, in addition to a free cash flow valuation of the enterprise, the Treasury team should also estimate the equity value using the earnings valuation technique, and compare their results with the discounted cash flow estimate. For valuing Ottotek Corporation, the treasury team has been asked to use relevant data relating to five companies that are quoted on NYSE/NASDAQ, are engaged in the same line of activity as Ottotek, and have debt equity ratios that are not hugely different from Ottotek's own gearing level. The five companies that have been identified for this purpose are BorgWarner Inc (BWA), Dana Inc (DAN). Lear Corporation (LEA), LKQ Corporation (LKQ), and Meritor Inc (MTOR). It is now 30 September 2021. Key data from Ottotek Corporation's income statements for the last three years are summarised below: (USD millions) Year ended 30 September 2019 2020 2021 Sales revenue 28.43 27.24 32.55 Operating profit (after depreciation) 9.96 11.07 Net interest costs 2.70 2.75 2.90 Profit before tax 7.26 6.76 8.17 Taxation 2.31 2.02 2.20 After tax profit 4.95 4.74 5.97 Dividends 0.31 0.36 0.43 Retained earnings 4.64 4.38 5.54 9.51 In addition to the above, the following further information has been gathered by the treasury team for the purpose of estimating the free cash flows and appropriate weighted average cost of capital for Ottotek Corporation: In each of the next three years Ottotek Corporation's sales revenue is expected to increase at a rate equal to the compound annual growth rate experienced over the period shown above. The latest operating profit ratio will remain unchanged for the next three years. The annual capital investment required to maintain current operational levels is equivalent to the annual depreciation (accounting depreciation can be assumed to be equal to tax depreciation). However, additional working capital would need to be brought in at the start of every year for each of the next three years. The additional amount would be roughly 20% of the increase in sales revenue. After the next three years, the estimated free cash flow is expected to grow in perpetuity at about 2.5% per year in real terms-inflation rate is forecast at about 1.2% per year. Ottotek Corporation pays interest at an average rate of 8.34% on its borrowings, which are expected to remain at their current level of USD36 million. 91-day US Treasury Bills with a nominal value of $1000 are currently trading at a market price of $995.10; the yield on US Treasury Bills is calculated with a day count of 360 instead of 365) for a year. The market risk premium is currently estimated at 5.4% per annum. The corporation tax rate in USA is 28%. Ottotek Corporation and Mojo Inc have similar levels of gearing, and it is intended that current levels of gearing would continue unchanged after the takeover. Mojo Inc's latest balance sheet discloses the following information: Summarised information from last Balance Sheet of Mojo Inc USD millions Current Assets 25.20 Non-current Assets 240.20 Total assets 265.40 Liabilities 147.30 Equity - Ordinary share Capital (par value 25) 30.00 - Retained Earnings/Reserves 88.10 Total liabilities & equity 265.40 The liabilities of $147.30 million include debt in the form of 6.5% bonds maturing in 2026, with par value of $1000 per bond and a total par value of $134.00 million. Mojo Inc's securities are currently trading at the following prices: Bonds: $947 Ordinary shares: $2.25. Required: A. Perform an enterprise valuation of Ottotek Corporation using an appropriate discounted cash flow technique, and also perform an earnings valuation as requested by Mojo Inc's Chairman; compare the equity value of Ottotek corporation on the basis of the two different techniques. (circa 30 marks) Case Study: Valuation of Ottotek Corporation by Mojo Inc Mojo Inc, a US company engaged in the automotive industry, proposes to acquire Ottotek Corporation, an unlisted spare parts manufacturer. For this purpose the treasury team of Mojo Inc has been asked to estimate the enterprise value of Ottotek Corporation using the entity valuation method, based on its expected performance as a separate entity. However, the company's Chairman is not entirely comfortable with discounted cash flow techniques and has asked that, in addition to a free cash flow valuation of the enterprise, the Treasury team should also estimate the equity value using the earnings valuation technique, and compare their results with the discounted cash flow estimate. For valuing Ottotek Corporation, the treasury team has been asked to use relevant data relating to five companies that are quoted on NYSE/NASDAQ, are engaged in the same line of activity as Ottotek, and have debt equity ratios that are not hugely different from Ottotek's own gearing level. The five companies that have been identified for this purpose are BorgWarner Inc (BWA), Dana Inc (DAN), Lear Corporation (LEA), LKQ Corporation (LKQ), and Meritor Inc (MTOR). It is now 30 September 2021. Key data from Ottotek Corporation's income statements for the last three years are summarised below: (USD millions) Year ended 30 September Sales revenue Operating profit (after depreciation) Net interest costs Profit before tax Taxation After tax profit Dividends Retained earnings 2019 28.43 9.96 2.70 7.26 2.31 4.95 0.31 4.64 2020 27.24 9.51 2.75 6.76 2.02 4.74 0.36 2021 32.55 11.07 2.90 8.17 2.20 5.97 0.43 5.54 4.38 In addition to the above, the following further information has been gathered by the treasury team for the purpose of estimating the free cash flows and appropriate weighted average cost of capital for Ottotek Corporation: In each of the next three years Ottotek Corporation's sales revenue is expected to increase at a rate equal to the compound annual growth rate experienced over the period shown above. The latest operating profit ratio will remain unchanged for the next three years. The annual capital investment required to maintain current operational levels is equivalent to the annual depreciation (accounting depreciation can be assumed to be equal to tax depreciation). However, additional working capital would need to be brought in at the start of every year for each of the next three years. The additional amount would be roughly 20% of the increase in sales revenue. After the next three years, the estimated free cash flow is expected to grow in perpetuity at about 2.5% per year in real terms - inflation rate is forecast at about 1.2% per year. a Ottotek Corporation pays interest at an average rate of 8.34% on its borrowings, which are expected to remain at their current level of USD36 million. 91-day US Treasury Bills with a nominal value of $1000 are currently trading at a market price of $995.10; the yield on US Treasury Bills is calculated with a day count of 360 instead of 365) for a year. The market risk premium is currently estimated at 5.4% per annum. The corporation tax rate in USA is 28%. Ottotek Corporation and Mojo Inc have similar levels of gearing, and it is intended that current levels of gearing would continue unchanged after the takeover. Mojo Inc's latest balance sheet discloses the following information: Summarised information from last Balance Sheet of Mojo Inc USD millions Current Assets 25.20 Non-current Assets 240.20 Total assets 265.40 Liabilities 147.30 Equity - Ordinary share Capital (par value 25) 30.00 - Retained Earnings/Reserves 88.10 Total liabilities & equity 265.40 The liabilities of $147.30 million include debt in the form of 6.5% bonds maturing in 2026, with par value of $1000 per bond and a total par value of $134.00 million. Mojo Inc's securities are currently trading at the following prices: Bonds: $947 Ordinary shares: $2.25. Required: A. Perform an enterprise valuation of Ottotek Corporation using an appropriate discounted cash flow technique, and also perform an earnings valuation as requested by Mojo Inc's Chairman; compare the equity value of Ottotek corporation on the basis of the two different techniques. (circa 30 marks) Case Study: Valuation of Ottotek Corporation by Melo Ins Corporation, an unlisted spare parts manufacturer. For this purpose the treasury team of Molo Inc, a US company engaged in the automotive industry, proposes to acquire Ortotek Molo Inc has been asked to estimate the enterprise value of Omote Corporation using the entity valuation method, based on its expected performance as a separate entity techniques and has asked that, in addition to a free cash flow valuation of the enterprise. However, the company's Chairman is not entirely comfortable with discounted cash flow the Treasury team should also estimate the equity value using the earnings valuation technique, and compare their results with the discounted cash flow estimate For valuing Ottotek Corporation, the treasury team itas been asked to use relevant data relating to five companies that are quoted on NYSE/NASDAQ are engaged in the same line of activity as Ottotel, and have debt equity is that are not hugely different from Ottotek's own gearing level. The five companies that have been identified for this purpose are BorgWarner Inc (BWA), Dana Inc (DAN), Lear Corporation (LEA). L.RO Corporation (LKQ), and Meritor Inc (MTOR) 3.82 1.6 2.09 It is now 30 September 2021. Key data from Ottotek Corporations income statements for the last three years are summarised below (USD millions) Year ended 30 September 2015 2016 2017 Sales revenue 28.43 2726 32.55 Operating profiter depreciation) 9.96 9.51 11.07 Net interest costs 270 2.75 290 Profit before tax 7.26 6.76 8.17 Taxation 2.31 202 2:20 After tax profit 4.95 4.74 5.97 Dividends 0.31 0.36 Retained earnings 4.64 438 5.54 In addition to the above the following further information has been gathered by the treasury team for the purpose of estimating the free cash flows and appropriate weighted average cost of capital for Ottotek Corporation In each of the next three years Ottotek Corporation's sales revenue is expected to increase at a rate equal to the compound annual growth rate experienced over the period shown above CARG The latest operating profit ratio will remain unchanged for the next three years. The annual capital investment required to maintain current operational levels is equivalent to the annual depreciation (accounting depreciation can be assumed to be equal to tax depreciation). However, additional working capital would need to be brought in at the start of every year for each of the next three years. The additional amount would be roughly 20% of the increase in sales revenue After the next three years, the estimated free cash flow is expected to grow in perpetuity at about 2.5% per year in real terms - inflation rate is forecast at about 12% per year Wilay Lee Te CA No be Equity Ordonary 14 inciessta Total Thea U-6 MRT Manager Program with sec Bond Ord 1 Otto Corporation pays interest an average.34% ontbrite which are expected to remain their current level of 30 min 91 US Treasury Bill with a nominal value of 51000 currently trading market price of $995 10 the yielt on US Treasury Bills is calculated with a stay cont 360 instead of 365) for a year The market is premis currently estimated at 5 pantum The corporation tax rate in USA 20%. Ottotek Corporation and Moo Inc have similar levels of art and it is intended that current levels of pearing would contine unclumped after the takeover Mojo Inc's latest balance sheet discloses the following information Summarised information from last Balance Sheet of Mole Inc USD millions Current Ass 2020 Non current 240 20 Totalsts 2650 Liabilities 14730 Equity Ordinary share Capital (par value 254) 30,00 Retained Earnin/Reunes 10 Tocal liabilities & equity 26540 The abilities of $147,30 million include debt in the form of 65% bonds maturing in 2026 with par value of $1000 per bond and a total par value of $13400 million, Mojo Ine's securities are currently trading at the following prices Bonde $947 Ordinary shares $225 Veighted contge cost of capital masliet me Required A. Perform an enterprise valuation of Ottotek Corporation using an appropriate discounted cash flow technique, and also perform an earnings valuation as requested by Mojo Inc's Chairman, compare the equity value of Ottotek corporation on the basis of the two different techniques (circa 30 marks) diddord voduction + carning valuseasive Case Study: Valuation of Ottotek Corporation by Mojo Inc Mojo Inc, a US company engaged in the automotive industry, proposes to acquire Ottotek Corporation, an unlisted spare parts manufacturer. For this purpose the treasury team of Mojo Inc has been asked to estimate the enterprise value of Ottotek Corporation using the entity valuation method, based on its expected performance as a separate entity However, the company's Chairman is not entirely comfortable with discounted cash flow techniques and has asked that, in addition to a free cash flow valuation of the enterprise the Treasury team should also estimate the equity value using the earnings valuation technique, and compare their results with the discounted cash flow estimate For valuing Ottotek Corporation, the treasury team has been asked to use relevant data relating to five companies that are quoted on NYSE/NASDAQ, are engaged in the same line of activity as Ottotek, and have debt equity ratios that are not hugely different from Ottotek's own gearing level. The five companies that have been identified for this purpose are BorgWarner Inc (BWA), Dana Inc (DAN). Lear Corporation (LEA), EKQ Corporation (LKQ), and Meritor Inc (MTOR). 2.42 1.53 1162 09 It is now 30 September 2021. Key data from Ottotek Corporation's income statements for the last three years are summarised below: (USD millions) Year ended 30 September 2015 2016 2017 Sales revenue 28.43 27.24 32.55 Operating profit (after depreciation) 9.96 9.51 11.07 Net interest costs 2.70 2.75 2.90 Profit before tax 7.26 6.76 8.17 Taxation 231 2.02 2.20 After tax profit 4.95 4.74 5.97 Dividends 0.31 0.36 0.43 Retained earnings 4.64 4.38 5.54 In addition to the above, the following further information has been gathered by the treasury team for the purpose of estimating the free cash flows and appropriate weighted average cost of capital for Ottotek Corporation: In each of the next three years Ottotek Corporation's sales revenue is expected to increase at a rate equal to the compound annual growth rate experienced over the period shown above CARG The latest operating profit ratio will remain unchanged for the next three years The annual capital investment required to maintain current operational levels is equivalent to the annual depreciation (accounting depreciation can be assumed to be equal to tax depreciation) However, additional working capital would need to be brought in at the start of every year for each of the next three years. The additional amount would be roughly 20% of the increase in sales revenue. After the next three years, the estimated free cash flow is expected to grow in perpetuilty at about 2.5% per year in real terms-inflation rate is forecast at about 1.2% per year Vijay Lee Ottotek Corporation pays interest at an average rate of 8.34% on its borrowings, which are expected to remain at their current level of USD36 million. 91-day US Treasury Bills with a nominal value of $1000 are currently trading at a market price of $995.10; the yield on US Treasury Bills is calculated with a day count of 360 (instead of 365) for a year. The market risk premium is currently estimated at 5.4% per annum. The corporation tax rate in USA is 28%. T'm-r) Ottotek Corporation and Mojo Inc have similar levels of gearing, and it is intended that current levels of gearing would continue unchanged after the takeover. Mojo Inc's latest balance sheet discloses the following information: Summarised information from last Balance Sheet of Mojo Inc USD millions Current Assets 25.20 Non-current Assets 240.20 Total assets 265.40 Liabilities 147.30 Equity - Ordinary share Capital (par value 250) 30.00 Retained Earnings/Reserves 88.10 Total liabilities & equity 265.40 The liabilities of $147.30 million include debt in the form of 6.5% bonds maturing in 2026, with par value of $1000 per bond and a total par value of $134.00 million. Mojo Inc's securities are currently trading at the following prices: Bonds: $947 market value Ordinary shares: $2.25. Required: A. Perform an enterprise valuation of Ottotek Corporation using an appropriate discounted cash flow technique, and also perform an earnings valuation as requested by Mojo Inc's Chairman; compare the equity value of Ottotek corporation on the basis of the two different techniques. (circa 30 marks) weighted average cost of capital dividend valuation & earnings saluation Searing ' Case Study: Valuation of Ottotek Corporation by Mojo Inc Mojo Inc, a US company engaged in the automotive industry, proposes to acquire Ottotek Corporation, an unlisted spare parts manufacturer. For this purpose the treasury team of Mojo Inc has been asked to estimate the enterprise value of Ottotek Corporation using the entity valuation method, based on its expected performance as a separate entity. However, the company's Chairman is not entirely comfortable with discounted cash flow techniques and has asked that, in addition to a free cash flow valuation of the enterprise, the Treasury team should also estimate the equity value using the earnings valuation technique, and compare their results with the discounted cash flow estimate. For valuing Ottotek Corporation, the treasury team has been asked to use relevant data relating to five companies that are quoted on NYSE/NASDAQ, are engaged in the same line of activity as Ottotek, and have debt equity ratios that are not hugely different from Ottotek's own gearing level. The five companies that have been identified for this purpose are BorgWarner Inc (BWA), Dana Inc (DAN). Lear Corporation (LEA), LKQ Corporation (LKQ), and Meritor Inc (MTOR). It is now 30 September 2021. Key data from Ottotek Corporation's income statements for the last three years are summarised below: (USD millions) Year ended 30 September 2019 2020 2021 Sales revenue 28.43 27.24 32.55 Operating profit (after depreciation) 9.96 11.07 Net interest costs 2.70 2.75 2.90 Profit before tax 7.26 6.76 8.17 Taxation 2.31 2.02 2.20 After tax profit 4.95 4.74 5.97 Dividends 0.31 0.36 0.43 Retained earnings 4.64 4.38 5.54 9.51 In addition to the above, the following further information has been gathered by the treasury team for the purpose of estimating the free cash flows and appropriate weighted average cost of capital for Ottotek Corporation: In each of the next three years Ottotek Corporation's sales revenue is expected to increase at a rate equal to the compound annual growth rate experienced over the period shown above. The latest operating profit ratio will remain unchanged for the next three years. The annual capital investment required to maintain current operational levels is equivalent to the annual depreciation (accounting depreciation can be assumed to be equal to tax depreciation). However, additional working capital would need to be brought in at the start of every year for each of the next three years. The additional amount would be roughly 20% of the increase in sales revenue. After the next three years, the estimated free cash flow is expected to grow in perpetuity at about 2.5% per year in real terms-inflation rate is forecast at about 1.2% per year. Ottotek Corporation pays interest at an average rate of 8.34% on its borrowings, which are expected to remain at their current level of USD36 million. 91-day US Treasury Bills with a nominal value of $1000 are currently trading at a market price of $995.10; the yield on US Treasury Bills is calculated with a day count of 360 instead of 365) for a year. The market risk premium is currently estimated at 5.4% per annum. The corporation tax rate in USA is 28%. Ottotek Corporation and Mojo Inc have similar levels of gearing, and it is intended that current levels of gearing would continue unchanged after the takeover. Mojo Inc's latest balance sheet discloses the following information: Summarised information from last Balance Sheet of Mojo Inc USD millions Current Assets 25.20 Non-current Assets 240.20 Total assets 265.40 Liabilities 147.30 Equity - Ordinary share Capital (par value 25) 30.00 - Retained Earnings/Reserves 88.10 Total liabilities & equity 265.40 The liabilities of $147.30 million include debt in the form of 6.5% bonds maturing in 2026, with par value of $1000 per bond and a total par value of $134.00 million. Mojo Inc's securities are currently trading at the following prices: Bonds: $947 Ordinary shares: $2.25. Required: A. Perform an enterprise valuation of Ottotek Corporation using an appropriate discounted cash flow technique, and also perform an earnings valuation as requested by Mojo Inc's Chairman; compare the equity value of Ottotek corporation on the basis of the two different techniques. (circa 30 marks) Case Study: Valuation of Ottotek Corporation by Mojo Inc Mojo Inc, a US company engaged in the automotive industry, proposes to acquire Ottotek Corporation, an unlisted spare parts manufacturer. For this purpose the treasury team of Mojo Inc has been asked to estimate the enterprise value of Ottotek Corporation using the entity valuation method, based on its expected performance as a separate entity. However, the company's Chairman is not entirely comfortable with discounted cash flow techniques and has asked that, in addition to a free cash flow valuation of the enterprise, the Treasury team should also estimate the equity value using the earnings valuation technique, and compare their results with the discounted cash flow estimate. For valuing Ottotek Corporation, the treasury team has been asked to use relevant data relating to five companies that are quoted on NYSE/NASDAQ, are engaged in the same line of activity as Ottotek, and have debt equity ratios that are not hugely different from Ottotek's own gearing level. The five companies that have been identified for this purpose are BorgWarner Inc (BWA), Dana Inc (DAN), Lear Corporation (LEA), LKQ Corporation (LKQ), and Meritor Inc (MTOR). It is now 30 September 2021. Key data from Ottotek Corporation's income statements for the last three years are summarised below: (USD millions) Year ended 30 September Sales revenue Operating profit (after depreciation) Net interest costs Profit before tax Taxation After tax profit Dividends Retained earnings 2019 28.43 9.96 2.70 7.26 2.31 4.95 0.31 4.64 2020 27.24 9.51 2.75 6.76 2.02 4.74 0.36 2021 32.55 11.07 2.90 8.17 2.20 5.97 0.43 5.54 4.38 In addition to the above, the following further information has been gathered by the treasury team for the purpose of estimating the free cash flows and appropriate weighted average cost of capital for Ottotek Corporation: In each of the next three years Ottotek Corporation's sales revenue is expected to increase at a rate equal to the compound annual growth rate experienced over the period shown above. The latest operating profit ratio will remain unchanged for the next three years. The annual capital investment required to maintain current operational levels is equivalent to the annual depreciation (accounting depreciation can be assumed to be equal to tax depreciation). However, additional working capital would need to be brought in at the start of every year for each of the next three years. The additional amount would be roughly 20% of the increase in sales revenue. After the next three years, the estimated free cash flow is expected to grow in perpetuity at about 2.5% per year in real terms - inflation rate is forecast at about 1.2% per year. a Ottotek Corporation pays interest at an average rate of 8.34% on its borrowings, which are expected to remain at their current level of USD36 million. 91-day US Treasury Bills with a nominal value of $1000 are currently trading at a market price of $995.10; the yield on US Treasury Bills is calculated with a day count of 360 instead of 365) for a year. The market risk premium is currently estimated at 5.4% per annum. The corporation tax rate in USA is 28%. Ottotek Corporation and Mojo Inc have similar levels of gearing, and it is intended that current levels of gearing would continue unchanged after the takeover. Mojo Inc's latest balance sheet discloses the following information: Summarised information from last Balance Sheet of Mojo Inc USD millions Current Assets 25.20 Non-current Assets 240.20 Total assets 265.40 Liabilities 147.30 Equity - Ordinary share Capital (par value 25) 30.00 - Retained Earnings/Reserves 88.10 Total liabilities & equity 265.40 The liabilities of $147.30 million include debt in the form of 6.5% bonds maturing in 2026, with par value of $1000 per bond and a total par value of $134.00 million. Mojo Inc's securities are currently trading at the following prices: Bonds: $947 Ordinary shares: $2.25. Required: A. Perform an enterprise valuation of Ottotek Corporation using an appropriate discounted cash flow technique, and also perform an earnings valuation as requested by Mojo Inc's Chairman; compare the equity value of Ottotek corporation on the basis of the two different techniques. (circa 30 marks)