Q3: How much is Marvel’s equity worth per share under the proposed restructuring plan assuming it acquires Toy Biz as planned? What is your assessment of the pro forma financial projections and liquidation assumptions? To get the equity per share, we will utilize the discounted free cash flow method. Free Cash Flow: The first step is getting the free cash flow for the next five years. The basic steps to get free cash flow is Net Income+Depreciation and Amortization-Changes in Net Working Capital-Capital Expenditure, but there are two extraordinary items1. Undistributed earnings in unconsolidated subsidiaries: this will be there when income is earned but not distributed back to the parent company, it should be subtract from net earning because no real cash flow from subsidiaries to parent company, but added to net income. 2. Minority interest in Toy Biz earnings: Similar to depression, it was counted as cost in the calculation of net income, but no real flow of cash, so it should be added back. Weighted Average Cost of Capital:The next step is calculating WACC: Kd is Weighted average of all three classes of Marvel’s public debt; Ke is calculated using CAPM method, where Average return of S;P 500 over the date range 1997 to 2001 is used for the market return and risk free rate is the most commonly used three-month U.
S. Treasury bill rate. The leverage beta is 2. 5, calculated using the asset beta of 0. 65 and assuing debt’s beta as 0.
D/(D+E) is the average value of Debt-to-Total Capital of the next five years. Tax rate is get by dividing tax paid by net income before tax. With everything in hand, we can easily get the WACC should be 8. %, a 0. 8% premium to WACC is added to make it higher and account for operating distress. Terminal Value To calculate the terminal value, we assume the growth rate of Marvel’s business after 2001 will be 5% perpetuity.
Equity per share: Discount back the free cash flow after 1997, we can get the firm value and then subtract the debt to get Marvel’s equity value of 283. 86 million. Total shares outstanding is 533. 75 million as 427 million new shares represent 80% of the total new shares. The Equity per share is finally calculated by divided Marvel’s equity value by total share outstanding, which is 0. 3 dollar. Detailed calculation is in the exhibit. Pro forma financial statements are good but we have little hold back toward the leverage ratio, its debt seems too high although it is on a decreasing trend.
It is not correctly reflecting the difficult that Marvel will face when issuing bond in the future. Other than that, everything including the growth rate are reasonable. Overall, the assumptions are good. The Liquidation assumption are also good, they have reasonable purchase discount to reflect the “fire sale” and other assumptions are fine too.