Interco Valuation Assumptions
Income Statement Apparel Group Growth Retail Group Growth Footwear Furniture Operating Margin % - Apparel Operating Margin % - Retail Operating Margin % - Footwear Operating Margin % - Furniture Tax % 43% 1989 7.1% 7.6% 6.3% 7.7% 6.4% 6.5% 9.1% 13.1% 1990 7.1% 7.6% 6.3% 7.7% 6.5% 6.6% 9.2% 13.2% 1991 7.1% 7.6% 6.3% 7.7% 6.5% 6.7% 9.4% 13.3% 1992 7.1% 7.6% 6.3% 7.7% 6.6% 6.8% 9.5% 13.4% 1993 7.1% 7.6% 6.3% 7.7% 6.7% 6.9% 9.7% 13.5% 1994 7.1% 7.6% 6.3% 7.7% 6.7% 7.1% 9.8% 13.7% 1995 7.1% 7.6% 6.3% 7.7% 6.8% 7.2% 10.0% 13.8% 1996 7.1% 7.6% 6.3% 7.7% 6.9% 7.3% 10.1% 13.9% 1997 7.1% 7.6% 6.3% 7.7% 6.9% 7.4% 10.3% 14.0% 1998 7.1% 7.6% 6.3% 7.7% 7.0% 7.5% 10.4% 14.1%
Balance Sheet Change in Working Capital - Apparel Change in Working Capital - Retail Change in Working Capital - Footwear Change in Working Capital - Furniture 1989 0.0% 0.0% 0.0% 0.0% 1990 0.0% 0.0% 0.0% 0.0% 1991 0.0% 0.0% 0.0% 0.0% 1992 0.0% 0.0% 0.0% 0.0% 1993 0.0% 0.0% 0.0% 0.0% 1994 12.5% 7.5% 12.5% 12.5% 1995 12.5% 7.5% 12.5% 12.5% 1996 12.5% 7.5% 12.5% 12.5% 1997 12.5% 7.5% 12.5% 12.5% 1998 12.5% 7.5% 12.5% 12.5%
Valuation Discount Rate Terminal Multiple 12% 14
* Operating margins are assumed to grow linearly over the 10-year period. * Working capital is assumed not to change between 1989 and 1993 per Wasserstein's assumptions (See Exhibit - 12)
Scenario 1: Valuation Assuming all 4 Divisions are Retained Terminal Multiple = 14 11% 12% $ 536,953 $ 409,653 $ 845,143 $ 1,586,569 $ 3,378,317 $ 90.09 $ 501,969 $ 382,201 $ 789,317 $ 1,480,447 $ 3,153,934 $ 84.10 Terminal Multiple = 15 11% 12% $ 556,728 $ 425,494 $ 876,974 $ 1,647,669 $ 3,506,864 $ 93.52 $ 520,048 $ 396,683 $ 818,417 $ 1,536,306 $ 3,271,454 $ 87.24 Terminal Multiple = 16 11% 12% $ 576,503 $ 441,335 $ 908,805 $ 1,708,769 $ 3,635,412 $ 96.94 $ 538,126 $ 411,165 $ 847,518 $ 1,592,165 $ 3,388,974 $ 90.37
10% Segment Apparel Retail Footwear Furniture Total
Price per share
13% $ 469,936 $ 357,087 $ 738,223 $ 1,383,360 $ 2,948,606 $ 78.63
10% $ 596,853 $ 457,037 $ 941,056 $ 1,769,584 $ 3,764,531 $ 100.39
13% $ 486,478 $ 370,338 $ 764,848 $ 1,434,468 $ 3,056,131 $ 81.50
10% $ 618,501 $ 474,379 $ 975,902 $ 1,836,472 $ 3,905,254 $ 104.14
13% $ 503,019 $ 383,588 $ 791,474 $ 1,485,575 $ 3,163,656 $ 84.36
$ 575,205 $ 439,695 $ 906,210 $ 1,702,697 $ 3,623,807 $ 96.63
Scenario 2: Valuation Assuming that the Apparel and Retail Divisions are Divested Terminal Multiple = 14 11% 12% $ 354,389 $ 270,371 $ 845,143 $ 1,586,569 $ 3,056,471 $ 81.51 $ 331,299 $ 252,252 $ 789,317 $ 1,480,447 $ 2,853,316 $ 76.09 Terminal Multiple = 15 11% 12% $ 367,440 $ 280,826 $ 876,974 $ 1,647,669 $ 3,172,909 $ 84.61 $ 343,231 $ 261,811 $ 818,417 $ 1,536,306 $ 2,959,766 $ 78.93 Terminal Multiple = 16 11% 12% $ 380,492 $ 291,281 $ 908,805 $ 1,708,769 $ 3,289,347 $ 87.72 $ 355,163 $ 271,369 $ 847,518 $ 1,592,165 $ 3,066,215 $ 81.77
10% Segment Apparel Retail Footwear Furniture Total
Price per share
13% $ 310,158 $ 235,678 $ 738,223 $ 1,383,360 $ 2,667,418 $ 71.13
10% $ 393,923 $ 301,644 $ 941,056 $ 1,769,584 $ 3,406,208 $ 90.83
13% $ 321,075 $ 244,423 $ 764,848 $ 1,434,468 $ 2,764,814 $ 73.73
10% $ 408,211 $ 313,090 $ 975,902 $ 1,836,472 $ 3,533,675 $ 94.23
13% $ 331,992 $ 253,168 $ 791,474 $ 1,485,575 $ 2,862,209 $ 76.33
$ 379,635 $ 290,199 $ 906,210 $ 1,702,697 $ 3,278,741 $ 87.43 34%
Tax Rate on Divestitures :
Barriers to Replicating Wasserstein Valuation Model 1. Operating margin is "staggered" over the valuation period, but method used by Wasserstein is not clear. 2. Allocation of corporate expenses to each business segment is not given, and hence, must be assumed. 3. Tax rate applied to proceeds from divestitures is not given (Above analysis assumes a 34% tax rate). 4. Change in working capital from 1989 to 1993 is assumed to be zero per the assumptions provided in Exhibit - 12 of the case. 5. Interest expense is allocated based on the percentage of sales generated by each business segment. 6. Net Corporate Adjustments figures provided in Exhibit - 13 could not be replicated based on the information provided in the case.
DCF Valuation Apparel Division
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Terminal Value
Revenue Operating Profit - Apparel Cash Taxes Paid NOPLAT Change in Working Capital - Apparel Free Cash Flow (FCF) PV of Terminal Value Present Value of FCF Total PV
$ $ $ $ $ $ $ $ $
870,935 55,740 18,946 36,794 36,794 253,103 32,852 501,969
$ $ $ $ $ $
932,771 60,319 20,909 39,410 39,410
$ $ $ $ $ $
998,998 65,268 23,030 42,238 42,238
$ $ $ $ $ $
1,069,927 70,615 25,322 45,293 45,293
$ $ $ $ $ $
1,145,892 76,393 27,799 48,594 48,594
$ $ $ $ $ $
1,227,250 82,635 30,474 52,161 10,170 41,991
$ $ $ $ $ $
1,314,385 89,378 33,364 56,014 10,892 45,123
$ $ $ $ $ $
1,407,706 96,663 36,485 60,177 11,665 48,512
$ $ $ $ $ $
1,507,653 104,531 39,857 64,674 12,493 52,180
$ $ $ $ $ $
1,614,697 113,029 43,498 69,530 13,380 56,150 $ 786,100
$
31,418
$
30,064
$
28,785
$
27,574
$
21,274
$
20,411
$
19,593
$
18,817
$
18,079
$
-
DCF Valuation Retail Division
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Terminal Value
Revenue Operating Profit - Apparel Cash Taxes Paid NOPLAT Change in Working Capital - Apparel Free Cash Flow (FCF) PV of Terminal Value Present Value of FCF Total PV
$ $ $ $ $ $ $ $ $
572,702 37,226 12,703 24,522 24,522 202,752 21,895 382,201
$ $ $ $ $ $
616,227 40,739 14,194 26,545 26,545
$ $ $ $ $ $
663,061 44,572 15,822 28,751 28,751
$ $ $ $ $ $
713,453 48,753 17,598 31,155 31,155
$ $ $ $ $ $
767,676 53,311 19,536 33,775 33,775
$ $ $ $ $ $
826,019 58,280 21,650 36,630 4,376 32,254
$ $ $ $ $ $
888,797 63,697 23,956 39,741 4,708 35,033
$ $ $ $ $ $
956,345 69,601 26,470 43,131 5,066 38,065
$ $ $ $ $ $
1,029,027 76,034 29,210 46,824 5,451 41,372
$ $ $ $ $ $
1,107,233 83,043 32,197 50,845 5,865 44,980 $ 629,717
$
21,162
$
20,464
$
19,799
$
19,165
$
16,341
$
15,847
$
15,374
$
14,919
$
14,482
$
-
DCF Valuation Footwear Division
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Terminal Value
Revenue Operating Profit - Apparel Cash Taxes Paid NOPLAT Change in Working Capital - Apparel Free Cash Flow (FCF) PV of Terminal Value Present Value of FCF Total PV
$ $ $ $ $ $ $ $ $
946,507 86,132 31,528 54,605 54,605 407,407 48,754 789,317
$ $ $ $ $ $
1,006,137 93,012 34,515 58,496 58,496
$ $ $ $ $ $
1,069,523 100,416 37,727 62,689 62,689
$ $ $ $ $ $
1,136,903 108,385 41,181 67,204 67,204
$ $ $ $ $ $
1,208,528 116,959 44,893 72,066 72,066
$ $ $ $ $ $
1,284,666 126,183 48,883 77,299 9,517 67,782
$ $ $ $ $ $
1,365,600 136,105 53,172 82,933 10,117 72,816
$ $ $ $ $ $
1,451,632 146,776 57,782 88,995 10,754 78,241
$ $ $ $ $ $
1,543,085 158,252 62,735 95,517 11,432 84,085
$ $ $ $ $ $
1,640,300 170,591 68,058 102,533 12,152 90,382 $ 1,265,343
$
46,633
$
44,621
$
42,709
$
40,892
$
34,341
$
32,938
$
31,600
$
30,322
$
29,100
$
-
DCF Valuation Furniture Division
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Terminal Value
Revenue Operating Profit - Apparel Cash Taxes Paid NOPLAT Change in Working Capital - Apparel Free Cash Flow (FCF) PV of Terminal Value Present Value of FCF Total PV
$ $ $ $ $ $ $ $ $
1,190,691 155,981 60,046 95,935 95,935 782,022 85,656 1,480,447
$ $ $ $ $ $
1,282,375 169,416 65,763 103,653 103,653
$ $ $ $ $ $
1,381,117 183,996 71,970 112,026 112,026
$ $ $ $ $ $
1,487,463 199,816 78,707 121,108 121,108
$ $ $ $ $ $
1,601,998 216,982 86,021 130,961 130,961
$ $ $ $ $ $
1,725,352 235,606 93,959 141,647 15,419 126,228
$ $ $ $ $ $
1,858,204 255,813 102,574 153,238 16,607 136,632
$ $ $ $ $ $
2,001,286 277,734 111,924 165,810 17,885 147,925
$ $ $ $ $ $
2,155,385 301,514 122,069 179,446 19,262 160,184
$ $ $ $ $ $
2,321,349 327,310 133,076 194,234 20,746 173,489 $ 2,428,841
$
82,632
$
79,738
$
76,967
$
74,311
$
63,951
$
61,805
$
59,744
$
57,764
$
55,859
$
-
Interco Income Statement
Per Financial Statement 1986 1987 1988 Apparel Retail Footwear Furniture Total Revenue Revenue Growth % Apparel Retail Footwear Furniture Operating Income Apparel Retail Footwear Furniture EBIT Apparel Retail Footwear Furniture Total Interest Expense Apparel Retail Footwear Furniture EBT Apparel Retail Footwear Furniture Taxes Apparel Retail Footwear Furniture Net Income $ 907,833 461,785 558,286 904,480 $ 2,832,384 $ 817,660 498,324 663,521 967,397 $ 2,946,902 $ 813,198 532,251 890,411 1,105,563 $ 3,341,423 1 1989 $ 870,935 572,702 946,507 1,190,691 $ 3,580,835 2 1990 3 1991 4 1992 5 1993 6 1994 7 1995 8 1996 9 1997 10 1998 11 1999 -
$ 932,771 $ 998,998 $ 1,069,927 $ 1,145,892 $ 1,227,250 $ 1,314,385 $ 1,407,706 $ 1,507,653 $ 1,614,697 616,227 663,061 713,453 767,676 826,019 888,797 956,345 1,029,027 1,107,233 1,006,137 1,069,523 1,136,903 1,208,528 1,284,666 1,365,600 1,451,632 1,543,085 1,640,300 1,282,375 1,381,117 1,487,463 1,601,998 1,725,352 1,858,204 2,001,286 2,155,385 2,321,349 $ 3,837,510 $ 4,112,700 $ 4,407,747 $ 4,724,094 $ 5,063,287 $ 5,426,985 $ 5,816,970 $ 6,235,151 $ 6,683,579 7% 7% 7% 7% 7% 7% 7% 7% 7% 60,319 40,739 93,012 169,416 $ 363,486 60,319 40,739 93,012 169,416 $ 363,486 11,467 7,575 12,369 15,764 47,175 65,268 44,572 100,416 183,996 $ 394,252 65,268 44,572 100,416 183,996 $ 394,252 11,459 7,606 12,268 15,842 47,175 70,615 48,753 108,385 199,816 $ 427,569 70,615 48,753 108,385 199,816 $ 427,569 11,451 7,636 12,168 15,920 47,175 76,393 53,311 116,959 216,982 $ 463,644 76,393 53,311 116,959 216,982 $ 463,644 11,443 7,666 12,068 15,998 47,175 82,635 58,280 126,183 235,606 $ 502,704 82,635 58,280 126,183 235,606 $ 502,704 11,434 7,696 11,969 16,075 47,175 89,378 63,697 136,105 255,813 $ 544,993 89,378 63,697 136,105 255,813 $ 544,993 11,426 7,726 11,871 16,153 47,175 96,663 69,601 146,776 277,734 $ 590,773 96,663 69,601 146,776 277,734 $ 590,773 11,416 7,756 11,773 16,230 47,175 104,531 76,034 158,252 301,514 $ 640,331 104,531 76,034 158,252 301,514 $ 640,331 11,407 7,786 11,675 16,308 47,175 113,029 83,043 170,591 327,310 $ 693,973 113,029 83,043 170,591 327,310 $ 693,973 11,397 7,815 11,578 16,385 47,175
66,716 32,085 48,475 105,111 $ 252,387 66,716 32,085 48,475 105,111 $ 252,387 7,542 3,836 4,638 7,514 23,530
47,269 40,610 52,136 123,766 $ 263,781 47,269 40,610 52,136 123,766 $ 263,781 7,233 4,408 5,870 8,558 26,070
20,240 39,101 92,204 149,090 $ 300,635 20,240 39,101 92,204 149,090 $ 300,635 11,481 7,514 12,571 15,609 47,175
55,740 37,226 86,132 155,981 $ 335,078 55,740 37,226 86,132 155,981 $ 335,078 11,474 7,545 12,470 15,687 47,175
$
$
$
$
$
$
$
$
$
$
$
$
$
59,174 28,249 43,837 97,597 $ 228,857 25,327 12,090 18,762 41,772 97,951
40,036 36,202 46,266 115,208 $ 237,711 17,135 15,494 19,802 49,309 $ 101,740 22,900 20,707 26,464 65,899 $ 135,971
8,759 31,587 79,633 133,481 $ 253,460 3,749 13,519 34,083 57,130 $ 108,481 5,010 18,068 45,550 76,351 $ 144,979
44,266 29,681 73,663 140,294 $ 287,903 18,946 12,703 31,528 60,046 $ 123,223 25,320 16,977 42,135 80,248 $ 164,681
48,853 33,164 80,643 153,652 $ 316,311 20,909 14,194 34,515 65,763 $ 135,381 27,944 18,970 46,128 87,889 $ 180,930
53,809 36,967 88,148 168,153 $ 347,077 23,030 15,822 37,727 71,970 $ 148,549 30,779 21,145 50,421 96,184 $ 198,528
59,164 41,117 96,217 183,896 $ 380,394 25,322 17,598 41,181 78,707 $ 162,808 33,842 23,519 55,036 105,189 $ 217,585
64,950 45,645 104,890 200,984 $ 416,469 27,799 19,536 44,893 86,021 $ 178,249 37,151 26,109 59,997 114,963 $ 238,220
71,200 50,584 114,213 219,531 $ 455,529 30,474 21,650 48,883 93,959 $ 194,966 40,727 28,934 65,330 125,572 $ 260,563
77,953 55,971 124,234 239,660 $ 497,818 33,364 23,956 53,172 102,574 $ 213,066 44,589 32,015 71,062 137,086 $ 284,752
85,246 61,845 135,004 261,504 $ 543,598 36,485 26,470 57,782 111,924 $ 232,660 48,761 35,375 77,222 149,580 $ 310,938
93,124 68,248 146,577 285,207 $ 593,156 39,857 29,210 62,735 122,069 $ 253,871 53,267 39,038 83,842 163,138 $ 339,285
101,632 75,227 159,013 310,925 $ 646,798 43,498 32,197 68,058 133,076 $ 276,829 58,133 43,030 90,956 177,849 $ 369,968
$
33,848 16,158 25,075 55,826 $ 130,906