Case Study of Bg Group

A. METHODOLOGIES: 1. The Weighted Average Cost of Capital (WACC) Approach: This method offers a wide range of advantages. For instance, the Capital Assets Pricing Model (CAPM) is employed in the calculation of the Cost of Equity. Thus, the discounted rate of 7. 58 percent used in figure 1. 12 Appendix is likely to be precise. The total value of the firm is $4. 73 billion. Nonetheless, in view of the probabilities of forecasting errors in the estimation of cash flows, the degree of precision does not guarantee an accurate result.
Another drawback of the approach would be the failure to allow for the impacts of real options available to management on future cash flows. Hence, this method is considered as an alternative for crosschecking. The assumptions are the dividends grow constantly in perpetuity at 3 percent and the debt ratio is also constant at 28. 1 percent. For further analysis, please refer to item 2a and 3c in the Appraisal. 2. The EBIT Multiples Approach: Under this methodology, the debt-equity ratio was not required. Thus, the value of the firm is approximately $4. 3 billion after liquidity discount was taken into account. This yields an insignificantly different result compared to the result under the WACC method. However, since the average EBIT multiples strongly depend on the comparable companies in the industry, reliable information is less likely to be available in practice. Therefore, another approach is employed. 3. Adjusted Present Value (APV) Approach: The APV method is more complicated than two methods mentioned earlier inasmuch as it takes account of unlevered value of the firm and the interest tax shield.
Recent complexity of the method notwithstanding, APV provides management with an explicit valuation of interest tax shield and an assumption of constant debt-equity ratio is unnecessary. According to figure 1. 10, the total value of the firm before synergies is $5. 02 billion. Nonetheless, this method ignores the costs of financial distress, which might lead to an overvaluation of the firm with a significantly high debt ratio. 4. Conclusion: Under different methods employed above, the range of difference appears to be immaterial.

Thus, the value of the firm before synergies is expected to be approximately $4. 89 billion on average. For the purpose of consistency, APV method is selected for further analysis of the value of the firm both before and after synergies. B. FINANCIAL ANALYSIS: 1. Free Cash Flows (FCFs) Valuation: The present value of the cash flows is calculated based on the WACC rate and it is estimated at $1. 28 billion. The rate is used by reason of the assumption of different components, for instance cost of equity and cost of debt. For further information of the assumption, please refer to the Appraisal. . Terminal Values and Long-term Growth: The terminal value before synergies is $3. 45 billion whereas this amount after synergies is $8. 36 billion. In details, the synergies revenues and the backhaul synergies savings are the major contributors to the significant difference. Additionally, the terminal value represents the market value of free cash flows from AirThread Connections at all future dates. This, thereby, lends the analyst the plausibility to believe that the discounted rate is equal to the WACC rate of 7. 58 percent.
Lastly, to be conservative, that is, in the worst scenario, the figure of growth rate obtained in the Appraisal is around 3. 0 percent. 3. Non-operating Investment in Equity Affiliates: This amount of $1. 72 billion is equal to Equity in Earnings of Affiliates times the historic P/E multiple for the industry at 19. 1. These investments are valued under the market multiple approach because a thorough due diligence is not possible to be conducted. 4. Value of Operating Assets: This value is equivalent to the present value of the target company on a going concern basis.
It is estimated at $5. 02 billion before the synergies and at $10. 38 billion after the synergies. However, since the value of non-operating assets is not taken into account, the total value of the target company is not fully reflected. 5. Enterprise Value: The Enterprise value is equal to the sum of the value of operating assets and the value of nonoperating assets. i. Before Synergies: In this case, the synergies related business revenues and the backhaul synergies savings are not considered. The FCFs ppear to be more immaterial accordingly. It, therefore, leads to a lower Intermediate Term Value of $1. 57 billion and a lower Enterprise Value of $6. 74 billion. ii. After Synergies: With the effect of synergies, the FCFs and, thus, the Enterprise Value of $12. 1 billion appear to be more material. Importantly, the significant difference is contributed by the cost-saving efficiency in backhaul costs and the network utilization. Thus, more advantages would occur. Firstly, administrative expenses such as auditing fees are reduced.
Secondly, the market share will, in essence, increase and monopoly gains due to large regional client bases from the target company could be expected. The company will be able to set a higher price and to increase a sheer volume of sales. Also, the company will gain more reputation and the cost of capital will be lower accordingly. Lastly, due to its new size, the company will have more bargain power and the relationships with banking entities will be better. Consequently, the cost of borrowing tends to decrease.

Don't use plagiarized sources. Get Your Custom Essay on
Case Study of Bg Group
Just from $13/Page
Order Essay
Order a unique copy of this paper
(550 words)

Approximate price: $22

Basic features
  • Free title page and bibliography
  • Unlimited revisions
  • Plagiarism-free guarantee
  • Money-back guarantee
  • 24/7 support
On-demand options
  • Writer’s samples
  • Part-by-part delivery
  • Overnight delivery
  • Copies of used sources
  • Expert Proofreading
Paper format
  • 275 words per page
  • 12 pt Arial/Times New Roman
  • Double line spacing
  • Any citation style (APA, MLA, Chicago/Turabian, Harvard)

Our guarantees

At Solution Essays, we are determined to deliver high-quality papers to our clients at a fair price. To ensure this happens effectively, we have developed 5 beneficial guarantees. This guarantees will ensure you enjoy using our website which is secure and easy to use.

Money-back guarantee

Most companies do not offer a money-back guarantee but with Solution Essays, it’s either a quality paper or your money back. Our customers are assured of high-quality papers and thus there are very rare cases of refund requests due to quality concern.

Read more

Zero-plagiarism guarantee

All our papers are written from scratch and according to your specific paper instructions. This minimizes any chance of plagiarism. The papers are also passed through a plagiarism-detecting software thus ruling out any chance of plagiarism.

Read more

Free-revision policy

We offer free revisions in all orders delivered as long as there is no alteration in the initial order instruction. We will revise your paper until you are fully satisfied with the order delivered to you.

Read more

Privacy policy

All data on our website is stored as per international data protection rules. This ensures that any personal data you share with us is stored safely. We never share your personal data with third parties without your consent.

Read more

Fair-cooperation guarantee

Ordering and sending money to us is an indication that you are purchasing our products and services. To have business talks laid out in the official language, you can check on our terms and conditions and get more information about this.

Read more

Calculate the price of your order

550 words
We'll send you the first draft for approval by September 11, 2018 at 10:52 AM
Total price:
The price is based on these factors:
Academic level
Number of pages
Order your essay today and save 20% with the discount code: LEMONADEPlace Order
Live Chat+1(978) 822-0999EmailWhatsApp