. What is the maximum price that Monmouth should pay for Roberston? (Use the discounted cash flow model).

2.Would you recommend that Monmouth acquires Robertson? Explain in detail your position.

Exhibit 1 Condensed Operating and Stockholder Information, Robertson Tool Company (millions of dollars except per-share data) 1998 1999 2000 2001 2002 $ 48.5 $ 49.1 $ 53.7 $ 54.8 $ 55.3 32.6 33.1 35.9 37.2 37.9 10.7 11.1 11.5 11.9 12.3 2.0 2.3 2.4 2.3 2.1 Operations Sales Cost of Goods Selling, General and Administrative Costs Depreciation Expense Interest Expense .4 .7 .8 .8 .8 Income Before Taxes 2.8 1.9 3.1 2.6 2.2 Taxes 1.1 .8 1.2 1.0 .9 $1.7 $1.1 $1.9 $1.6 $1.3 Cost of Goods 67% 67% 67% 68% 69% Sell, Gen'l, Admin. 22% 23% 21% 22% 22% Operating Income 6.6% 5.3% 7.3% 6.2% 5.4% $ 2.91 $ 1.88 $ 3.25 $ 2.74 $ 2.23 Net Income Percentage of Sales Stockholder Information Earnings Per Share Dividends Per Share 1.60 1.60 1.60 1.60 1.60 Book Value Per Share 49.40 49.68 51.33 52.47 53.10 Market Price 33-46 35-48 29-41 25-33 23-32 Price/Earnings Ratio 11-16 10-26 9-13 9-12 10-14 Shares Outstanding 584,000 584,000 584,000 584,000 584,000 Exhibit 2 Balance Sheet at December 31, 2002, Robertson Tool Company (millions of dollars) Assets Liabilities and Net Worth Cash $ 1 Accounts Receivable Inventories Other 8 Net Plant and Equipment Total Assets Other 18 1 Current Assets Accounts Payable $ 2 2 Current Liabilities 4 Long-term Debt 12 Net Worth 31 28 19 $ 47 Collection Period (days) 53 Days of Inventory (days) 173 Sales/Total Assets 1.18 Total $ 47 Debt as % Capital 28% Total Assets/Net Worth 1.52 Exhibit 3 Condensed Operating and Stockholder Information, NDP Corporation (millions of dollars except per-share data) 1998 1999 2000 2001 2002 Sales $ 45 $ 97 $ 99 $ 98 $ 100 Net Income 1.97 3.20 3.20 1.13 2.98 $ 25 $ 46 $ 49 $ 41 $ 46 6 11 15 10 13 Net Working Capital 19 35 34 31 33 Long-term Debt 10 18 16 15 17 Shareholders' Equity 21 36 40 41 41 $ .78 $ .61 $ .59 $ .21 $ .54 0 0 0 0.20 0 Book Value Per Share 8.31 6.86 7.37 7.38 7.45 Market Price 6-17 10-18 7-18 4-10 5-8 Price/Earnings Ratio 8-22 16-30 12-31 19-48 9-15 Operations Financial Position Current Assets Current Liabilities Stockholders Information Earnings Per Share Dividends Per Share Shares Outstanding 2,525,600 5,245,900 5,430,100 5,510,000 5,501,000 Exhibit 4 ProFormas for Robertson Tool (millions of dollars) Actual 2002 Sales Forecasts 2003 2004 2005 2006 2007 to Infinity $ 55.3 $ 58.6 $ 62.1 $ 65.9 $ 69.8 $ 69.8 Cost of Goods 37.9 39.8 41.6 43.5 45.4 45.4 Gross Profit 17.4 18.8 20.5 22.4 24.4 24.4 Sell & Admin 12.3 12.3 12.4 12.5 13.3 13.3 Depreciation 2.1 2.3 2.5 2.7 2.9 2.9 EBIT 3.0 4.2 5.6 7.2 8.2 8.2 Tax @ 40% 1.2 1.7 2.2 2.9 3.3 3.3 EBIAT $ 1.8 $ 2.5 $ 3.4 $ 4.3 $ 4.9 $ 4.9 CoGS % Sales 69% 68% 67% 66% 65% 65% Sell & Admin % Sales 22% 21% 20% 19% 19% 19% $ 19.0 $ 20.7 $ 21.7 $ 22.6 $ 23.5 (4.0) (3.5) (3.6) (3.8) (2.9) 2.3 2.5 2.7 2.9 2.9 $ 20.7 $ 21.7 $ 22.6 $ 23.5 $ 23.5 Net Plant & Equip @ Beginning of Year Capital Expenditures Depreciation Expense Net Plant & Equip @ End of Year Exhibit 5 Five-Year Forecast of Monmouth, Inc. Earnings, Excluding Robertson Tool (millions of dollars except per-share data) Net Income Shares Outstanding (mil) Earnings Per Share 2003 2004 2005 2006 2007 $ 11.0 $ 11.9 $ 12.8 $ 13.8 $ 15.0 4.21 4.21 4.21 4.21 4.21 $ 2.61 $ 2.83 $ 3.04 $ 3.27 $ 3.56 Exhibit 6 Selected Financial Information on Quasi-Comparable Firms, 2002 Actuant Corp. Collection Period (days) Briggs & Stratton Idex Corp. Lincoln Electric Snap On Inc. Stanley Works Robertson Tool Co. 55 77 47 61 96 77 53 Inventory % Sales 12% 18% 13% 17% 18% 16% 33% Operating Margin % Sales 17% 13% 20% 15% 10% 15% 5% Return on Capital 21% 9% 10% 12% 11% 14% 4% 3.8 3.2 7.1 11.5 7.8 9.3 3.5 98% 52% 30% 27% 29% 40% 28% 29% 37% 20% 17% 19% 24% 37% BB- BB+ BBB - A+ A - $ 712 $ 1,443 $ 1,191 $ 1,145 $ 1,861 $ 3,014 $ 29 55 119 98 90 129 234 1.80 EBIAT Multiple 12.8 12.1 12.2 12.7 14.4 12.9 16.1 Share Price $ 42 $ 42 $ 29 $ 22 $ 26 $ 27 $ 30 Earnings Per Share 2.80 3.20 2.00 1.78 1.80 2.32 2.32 Price/Earnings 15.0 13.1 14.5 12.4 14.4 11.6 13.5 Equity Beta 1.00 1.00 1.00 .75 1.05 .95 Asset Beta .71 .63 .80 .63 .85 .73 Times Interest Earned Debt % Capital balance sheet values market values Bond Rating Value of Firm ($ mil) EBIAT ($ mil) Exhibit 7 Information on United States Capital Markets I. Interest Rates in May 2003 30-Year U.S. Treasury Bonds U.S. Corporate Bonds Rated A BBB AA 4.10% 4.52% 5.07% BB 6.07% II. Estimated Market Risk Premium = 5.5% over 30-Year U.S. Treasury Bonds III. Median Values of Key Ratios by Standard & Poors' Rating Category AAA AA A BBB BB B Times Interest Earned (X) EBITDA / Interest (X) Pre-tax Return on Capital (%) Debt as % Capital (%) Number of companies 5.9 7.6 15.1 43.7 213 3.4 4.6 12.5 51.9 297 1.5 2.3 8.8 74.9 345 27.3 31.0 25.2 12.6 6 18.0 21.4 25.4 36.1 15 10.4 12.8 19.7 38.4 118 IV. Debt and Times Interest Earned Ratios for Selected Industries AAA AA A Food Processing Debt % Capital Times Interest Earned Electrical Equipment Debt % Capital Times Interest Earned Electric Utilities Debt % Capital Times Interest Earned BBB BB 44% 7.9 - 51% 6.7 54% 4.3 53% 2.9 - - 36% 7.3 48% 3.2 72% 1.6 - 46% 4.0 54% 3.4 57% 2.7 73% 2.0 7.96% 1. What is the maximum price that Monmouth should pay for Roberston? (Use the discounted cash flow model). Using the discounted cash flow model: WACC=r D ( 1Tc ) Where D E +r V EV , D V =28%, E V =72%, Tc=40%, r E=r f + L ( MRP ) r f =4.10% (the 30-year U.S. Treasury Bonds from Exhibit 7); u = (0.71+0.63+0.80+0.63+0.85+0.73)6= 0.725 (average of the Asset Betas from Exhibit 6); D L = u(1+ ) =0.725*(1+0.39) = 1.01; E Estimated Market Risk Premium (MRP) = 5.5% (from Exhibit 7); r E=r f + L ( MRP ) =4.10 +1.015.5 =0.1015 ; r D=6.07 (Rank Robertson Tool Co. as BBB according to the financial statement analysis); V WACC=r D ( 1Tc ) D E +r V E 6.07 ( 140 )28 +10.15 72 =0.0833 Assumption: the growth rate of Working capital equals to the growth rate of sales. So we get Net Working Capital as follows: 2002 55.3 sales Growth rate of sales Working capital 24.0 Net working capital 2003 58.6 5.97% 2004 62.1 5.97% 2005 65.9 6.12% 2006 69.8 5.92% 2007 69.8 0.00% 25.4 1.4 27.0 1.5 28.6 1.6 30.3 1.7 30.3 0.0 Using Exhibit 4 and the Net Working Capital (above), we can calculate the free cash flow as follows: sales Cost of goods Gross profit Sell and Admin Depreciation EBIT Tax (40%) EBITAT Less: capital expenditures Plus: depreciation Less: net working capital Free cash flow 2002 55.3 37.9 17.4 12.3 2.1 3 1.2 1.8 2003 58.6 39.8 18.8 12.3 2.3 4.2 1.68 2.5 2004 62.1 41.6 20.5 12.4 2.5 5.6 2.24 3.4 2005 65.9 43.5 22.4 12.5 2.7 7.2 2.88 4.3 2006 69.8 45.4 24.4 13.3 2.9 8.2 3.28 4.9 2007 69.8 45.4 24.4 13.3 2.9 8.2 3.28 4.9 4 3.5 3.6 3.8 2.9 2.3 1.4 2.5 1.5 2.7 1.6 2.9 1.7 2.9 0 -0.6 0.9 1.8 2.3 4.9 Year from 2007 to infinity, we review as a perpetuity: PV (2007-perpetuity) = C /r =4.9/0.0833=59.06; PV= C1/(1+r)+C2/(1+r)2+C3/(1+r)3+C4/(1+r)4+(C5+PV(2007-perpetuity))/(1+r)5 PV=-0.6/(1+0.0833)+0.9/(1+0.0833)2+1.8/(1+0.0833)3+2.3/(1+0.0833)4+(4.9+59.06(2007perpetuity) )/(1+0.0833)5 =46.2 The Equity value = PV - Debt = 46.2-12=34.2 The number of Robertson's outstanding shares is 584,000. Maximum Price that Monmouth can afford to pay is = 34200000 / 584,000 outstanding shares = $ 58.56 2. Would you recommend that Monmouth acquires Robertson? Explain in detail your position. Yes. I would recommend that Monmouth acquires Robertson. This is because of the various benefits and synergies that the company would gain from the acquisition. These benefits include: Robertson has a large market share of about 50 percent for its products. This offers an opportunity to benefits from the strong brand name. The company has a strong distribution system characterized by heavy promotional and advertising programs. Monmouth can use this strong European distribution system in selling its other products. This acquisition could decrease the cost of goods sold from 69% to 65% The company would experience increased sales as Robertson would pull Monmouth's products strengthening their presence in this consumer and industrial market. Monmouth can also use the Robertson's strong European distribution system to sell its other products 2.Would you recommend that Monmouth acquires Robertson? Explain in detail your position. 1. What is the maximum price that Monmouth should pay for Roberston? (Use the discounted cash flow model). Using the discounted cash flow model: WACC=r D ( 1Tc ) Where D E +r V EV , D V =28%, E V =72%, Tc=40%, r E=r f + L ( MRP ) r f =4.10% (the 30-year U.S. Treasury Bonds from Exhibit 7); u = (0.71+0.63+0.80+0.63+0.85+0.73)6= 0.725 (average of the Asset Betas from Exhibit 6); D L = u(1+ ) =0.725*(1+0.39) = 1.01; E Estimated Market Risk Premium (MRP) = 5.5% (from Exhibit 7); r E=r f + L ( MRP ) =4.10 +1.015.5 =0.1015 ; r D=6.07 (Rank Robertson Tool Co. as BBB according to the financial statement analysis); V WACC=r D ( 1Tc ) D E +r V E 6.07 ( 140 )28 +10.15 72 =0.0833 Assumption: the growth rate of Working capital equals to the growth rate of sales. So we get Net Working Capital as follows: 2002 55.3 sales Growth rate of sales Working capital 24.0 Net working capital 2003 58.6 5.97% 2004 62.1 5.97% 2005 65.9 6.12% 2006 69.8 5.92% 2007 69.8 0.00% 25.4 1.4 27.0 1.5 28.6 1.6 30.3 1.7 30.3 0.0 Using Exhibit 4 and the Net Working Capital (above), we can calculate the free cash flow as follows: sales Cost of goods Gross profit Sell and Admin Depreciation EBIT Tax (40%) EBITAT Less: capital expenditures Plus: depreciation Less: net working capital Free cash flow 2002 55.3 37.9 17.4 12.3 2.1 3 1.2 1.8 2003 58.6 39.8 18.8 12.3 2.3 4.2 1.68 2.5 2004 62.1 41.6 20.5 12.4 2.5 5.6 2.24 3.4 2005 65.9 43.5 22.4 12.5 2.7 7.2 2.88 4.3 2006 69.8 45.4 24.4 13.3 2.9 8.2 3.28 4.9 2007 69.8 45.4 24.4 13.3 2.9 8.2 3.28 4.9 4 3.5 3.6 3.8 2.9 2.3 1.4 2.5 1.5 2.7 1.6 2.9 1.7 2.9 0 -0.6 0.9 1.8 2.3 4.9 Year from 2007 to infinity, we review as a perpetuity: PV (2007-perpetuity) = C /r =4.9/0.0833=59.06; PV= C1/(1+r)+C2/(1+r)2+C3/(1+r)3+C4/(1+r)4+(C5+PV(2007-perpetuity))/(1+r)5 PV=-0.6/(1+0.0833)+0.9/(1+0.0833)2+1.8/(1+0.0833)3+2.3/(1+0.0833)4+(4.9+59.06(2007perpetuity) )/(1+0.0833)5 =46.2 The Equity value = PV - Debt = 46.2-12=34.2 The number of Robertson's outstanding shares is 584,000. Maximum Price that Monmouth can afford to pay is = 34200000 / 584,000 outstanding shares = $ 58.56 2. Would you recommend that Monmouth acquires Robertson? Explain in detail your position. Yes. I would recommend that Monmouth acquires Robertson. This is because of the various benefits and synergies that the company would gain from the acquisition. These benefits include: Robertson has a large market share of about 50 percent for its products. This offers an opportunity to benefits from the strong brand name. The company has a strong distribution system characterized by heavy promotional and advertising programs. Monmouth can use this strong European distribution system in selling its other products. This acquisition could decrease the cost of goods sold from 69% to 65% The company would experience increased sales as Robertson would pull Monmouth's products strengthening their presence in this consumer and industrial market. Monmouth can also use the Robertson's strong European distribution system to sell its other products 2.Would you recommend that Monmouth acquires Robertson? Explain in detail your position