Summary

Delta Inc, a consumer conglomerate, is considering spinning off its K-Rite foods US division through an IPO of M&A sale.

Question

1.What is a reasonable estimate of K-Rite equity value?

2. Calculate Equity value, which is (i) not value of debt plus equity; nor (ii) enterprise value (EV) .

3. Use three methods we discussed, and provide an estimate, or small range, based on the three methods.

The date is June 2012

Two publicly-traded similar firms have (i) no debt and (ii) a cost of equity of 13% and 15%, respectively. Assume K-Rite will maintain a constant D/E ratio in the future.

For DCF, I think you need to estimate the equity value of the division with the comps approaches -- before determining the divisions WACC and DCF present value.

You can rely on these operating projections. Management projections for K-Rite operations are in millions. The FCFE projections include assumed income taxes at a 40% rate.

Projections	2013	2014	2015	2016	2017
EBITDA	40	43	46	41	49
Free cash flow to equity after debt service	15	16	22	14	24

K- Rite

Presented below is summary historical data. The division did not pay taxes in 2011, since the parent paid. As an independent firm, it would pay taxes at the 40% rate.

Summary Financial Data

Year Ended December 31, 2011

(In millions)

Income Statement
Sales	$ 600
EBITDA	$ 40
Depreciation and Amortization	8
EBIT	32
Interest	2
Operating Income	30
Growth rate about 8% annually the last 10 years.
Balance Sheet
Cash	$ 0
Other Current Assets	50
Fixed Assets	100
Other Assets	15
	$ 165
Current Liabilities	$ 15
Long-Term Debt	40
Stockholders Equity	100
	$ 165

K-Rite Comps

Comparable US Public Companies and Acquisitions

			Equity Value as a Multiple of		Enterprise Value as a Multiple of
Public US Companies with Normal Leverage	Date	$MM Equity Values	Net Earnings	Book Value	Latest 1 Year EBITDA			10 Year Sales Growth Rate
Krasch Foods	05/12	$ 300	16.3x	2.6x	8.3x			12%
Total Products	05/12	400	12.5	2.1	7.7			10
Case Foods	05/12	1,200	20.0	3.0	9.0			8
Walk	05/12	400	22.1	4.5	11.7			22
Yellow Foods	05/12	180	15.0	1.7	8.4			8
Recent US Acquisitions
Grace/Rose	02/12	$ 380	16.5x	2.4x	8.3x			12%
Nestle/LG	01/12	900	19.0	2.7	8.0			9
MidT/Gross foods	11/11	290	17.8	2.3	8.9			10
Sab Foods/Mrs Vs	10/11	200	20.9	3.0	10.2			14

Place calculations on these two pages or next page.