Raj Singh
Colt Industries
RSP Holdings after the deal Price of the Stub
Proposed Dividend 70 75 80 85 90
5 52.83% 54.43% 55.93% 57.33% 58.65%
10 37.39% 38.82% 40.19% 41.49% 42.74%
15 29.73% 30.94% 32.10% 33.23% 34.32%
20 25.15% 26.18% 27.18% 28.16% 29.11%
25 22.10% 23.00% 23.87% 24.73% 25.56%
Rough Interest Calculation (Assuming a fixed rate swap for all debt)
Interest on existing debt (estimated) 10.54% (LIBOR + 2.5%) on $700M senior 10.04% (LIBOR + 2%) on $200M revolver 12.5% on $525M 37.00 73.78 20.08 65.63 196.49
Rough Cash Flow Analysis
1985 232.4 (5.6) 226.8 (97.5) 129.3 8.7 31.6 (41.3) (136.7) (8.4) 1986 217.9 (98.0) 119.9 (51.6) 68.3 42.4 (53.0) (39.0) 18.7 10.3 1987 259.4 (196.5) 62.9 (27.1) 35.9 43.3 (62.0) (22.1) (50.0) (54.9) (44.6) 1988 273.9 (191.2) 82.7 (35.6) 47.1 46.9 (61.0) (7.6) (50.0) (24.6) (69.2) 1989 293.9 (186.0) 108.0 (46.4) 61.5 50.7 (59.5) (10.2) (50.0) (7.5) (76.7) 1990 318.7 (180.7) 138.0 (59.3) 78.7 54.7 (51.7) (14.2) (100.0) (32.5) (109.2) 1991 335.4 (170.1) 165.3 (71.1) 94.2 57.1 (51.9) (5.5) (100.0) (6.1) (115.3)
EBIT Interest EBT Taxes @43% NI Discont. Oper Add Depr Subtract CapEx Subt. Chg in WC Principal payment Change in Cash Cumm Cash Impact
Assumptions: 1. All projections from exhibit 6 2. Interest from the actual deal. 3. 1986 interest is Half of 1987 interest.
Raj Singh
Colt Industries Fraction Held by RSP
Fraction of Debt that enhances Val 0.300 0.325 0.350 0.375 0.400 0.425 0.450 0.475 0.500 0.525 0.550 0.575 0.600 0.615 0.650 0.675 0.700
Dividend Paid 70 32.3% 30.2% 28.4% 26.9% 25.5% 24.4% 23.3% 22.4% 21.6% 20.9% 20.2% 19.6% 19.1% 18.7% 18.1% 17.7% 17.3%
75 80 85 90
40.2% 36.6% 33.8% 31.4% 29.4% 27.7% 26.3% 25.0% 23.9% 23.0% 22.1% 21.3% 20.6% 20.2% 19.4% 18.8% 18.4%
52.6% 46.2% 41.3% 37.5% 34.5% 32.0% 29.9% 28.2% 26.7% 25.4% 24.2% 23.2% 22.3% 21.8% 20.8% 20.1% 19.5%
75.0% 61.6% 52.6% 46.2% 41.3% 37.5% 34.5% 32.0% 29.9% 28.2% 26.7% 25.4% 24.2% 23.6% 22.3% 21.5% 20.8%
127.9% 91.2% 71.6% 59.4% 51.1% 45.0% 40.4% 36.8% 33.9% 31.5% 29.5% 27.8% 26.4% 25.6% 24.0% 23.0% 22.1%
Price of the Stub
Fraction of Debt that enhances Val 0.300 0.325 0.350 0.375 0.400 0.425 0.450 0.475 0.500 0.525 0.550 0.575 0.600 0.615 0.650 0.675 0.700 Dividend Paid 70 12.98 14.60 16.23 17.86 19.49 21.12 22.75 24.37 26.00 27.63 29.26 30.89 32.52 33.49 35.77 37.40 39.03
75 80 85 90
9.37 11.12 12.86 14.61 16.35 18.10 19.84 21.58 23.33 25.07 26.82 28.56 30.31 31.36 33.80 35.54 37.29
5.77 7.63 9.49 11.35 13.21 15.07 16.93 18.79 20.66 22.52 24.38 26.24 28.10 29.22 31.82 33.68 35.54
2.16 4.14 6.12 8.10 10.07 12.05 14.03 16.00 17.98 19.96 21.94 23.91 25.89 27.08 29.85 31.82 33.80
-1.44 0.65 2.75 4.84 6.93 9.03 11.12 13.21 15.31 17.40 19.50 21.59 23.68 24.94 27.87 29.96 32.06
Early Exercise of American Call?
Early exercise of an American call is never optimal on a non-dividend paying stock.
Multi period pricing (American Call)
169 130 100 104 80 64 p p46 p+ 6 0
Let price of stock be St and compare strategies: • A: Early exercise and obtain (St-X) • B: Short the stock and obtain St. Invest the proceeds in the Riskfree asset. Payoff on maturity at time T from strategy B: ST >=X ST