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EM and Presentation Guidance Questions

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1. Was Borg-Warner’s Industrial Products Group a good candidate for a leveraged buyout in 1987? Evaluate the price paid and the structure of the deal that closed in May 1987. Are you optimistic about BW/IP’s prospects? 2. Do you favor the proposed acquisition of UCP? What are the primary sources of value in such a transaction? Is the proposed price reasonable? 3. How do the various features of the BW/IP buyout affect the company’s decisions about long-horizon opportunities such as the UCP acquisition? 4. What are the advantages and disadvantages of the 1987 buyout, viewed as a financial program? 5. As one of BW/IP’s bankers, would you approve of the company’s request for a waiver of covenants and financing of the UCP acquisition?

Netscape’s IPO
1. Why has Netscape been so successful to date? What appears to be its strategy? What must be accomplished if it is to be a highly successful going concern in the long run? How risky is its current competitive position? 2. Does Netscape need to go public to satisfy its capital needs? What would you estimate might be the magnitude of its capital needs over the next 3 to 5 years? What sources other than the public equity market could be tapped to satisfy those needs? 3. Why, in general, do companies go public? What are the advantages and disadvantages of public ownership? 4. The case points out that the IPO market is sometimes characterized as a “hot issue” market and that many IPOs are viewed in retrospect as having been “underpriced.” What might explain these phenomena? Should the Netscape board be concerned about underpricing? Why or why not? 5. Can the recommended offer price of $28 per share for Netscape’s stock be justified? In valuing Netscape, you might find it helpful to use the following assumptions: I. Total cost of revenues remains at 10.4% of total revenues; II. R&D remains at 36.8% of total revenues;

III. Other operating expenses decline on a straight-line basis from 80.9% of revenues in 1995 to 20.9% of revenues in 2001 (this would give Netscape a ratio of operating income to revenues close to Microsoft’s, which is about 34%); IV. Capital; expenditures decline from 45.8% of revenues in 1995 to 10.8% of revenues by 2001 (also close to Microsoft’s experience); V. Depreciation is held constant at 5.5% of revenues;

VI. Changes in net working capital of essentially zero;
VII. Long-term steady-state growth of 4% annually after 2005; and VIII. A long-term riskless interest rate of 6.71%
IX. Given these assumptions and starting from its current base of $16.625 million, how fast must Netscape grow on an annual basis over the next ten years to justify a $28 share value? 6. As an executive of Netscape, what would you recommend with respect to the proposed offering price? As an investor in Netscape, what would you recommend? AS a manager of an institutional fund who is willing to buy and hold Netscape’s stock at the originally proposed price of $14 per share, would you be willing to buy and hold at an initial offer price of $28. LinkedIn

1. What set of assumptions underlie the $9 billion market valuation of LinkedIn as of the end of July 7, 2011. What is your assessment of those assumptions? Note that, based on the first seven weeks of trading for LinkedIn’s stocks, its estimated beta is 1.5. 2. What do you think LinkedIn’s intrinsic value is? Elaborate on your valuation methods. 3. If you wanted to buy LinkedIn’s stock, would you be willing to pay more than the value you derived above? 4. What other factors may be contributing to LinkedIn’s market valuation? Arundel

1. Why do the principals f Arundel Partners think they can make money buying movie sequel rights? Why do the partners want to buy a portfolio of rights in advance rather than negotiating film-by-film to buy them? 2. Estimate the per-film value of a portfolio of sequel rights such as Arundel proposes to buy. [There are several ways to approach this problem, all of which require some part of the dataset in Exhibits 6-9. You may find it helpful to consult the Appendix, which explains how these figures were prepared]? 3. What are the primary advantages and disadvantages of the approach you took to value the rights? What further assistance or data would you require to refine your estimate of the rights’ value? 4. What problems or disadvantages would you expect Arundel and a major studio to encounter in the course of a relationship like that described in the case? What contractual terms and provisions should Arundel insist on? MW Petroleum

1. Evaluate Amoco’s and Apache’s corporate objectives and strategies. Is it reasonable to expect that the MW properties are more valuable to Apache than to Amoco? What sources of value most plausibly account for the differences between buyer and seller?

2. Structure and execute a discounted cash flow valuation of all of the MW reserves using APV. How much are the reserves worth? Is your estimate more likely to be biased high or low? What are the sources of the bias? 3. How would you structure an analysis of MW as a portfolio of assets-in-place and which as option? What kinds of options are present? Should this approach yield a higher or lower value than the all-APV approach you employed above? 4. Execute the analysis you structured in question 3, beginning with the assets-in-place. How risky are the assets that underlie the options; i.e., how would you estimate s for each? How much is the whole portfolio worth? 5. Assuming a sale goes through, how does Apache exercise each of the various options? When should it do so? Seagate

1. Why is Seagate undertaking this transaction? Is it necessary to divest the Veritas shares in a separate transaction? Who are the winners and losers from the transaction? 2. What are the benefits of leverage buyouts? Is the rigid disk drive industry conductive to a leverage buyout? 3. Luczo and the buyout team plan to finance their acquisition of Seagate’s operating assets using a combination of debt and equity. How much debt would you recommend them using? Why? 4. Based on the scenario presented in Exhibit 8, and on your assessment of the optimal amount of debt to be used in Seagate’s capital structure, how much are Seagate’s operating assets worth? For both of the assumptions listed below, estimate the value of Seagate’s operating assets. A

ssuming that of the $800 million in cash that the buyout team will acquire as part of the transaction, $500 million is required for net working capital and $300 million in excess cash. (a). assume the buyout team plans to maintain its debt at a constant percentage of the firm’s market value. (b). assume that the buyout team plans to pay down its debt as cash flow permits until the terminal debt level of $700 million is reached. Kohler

1. What is the total enterprise value of Kohler Co. using DCF method? What is the total enterprise value of the company using multiple approach? What is the value of a share held by a minority shareholder in Kohler Co.? 2. What assumptions can you use to arrive at the share price of $55,400 that was estimated by the company? 3. What assumptions can you use to arrive at the share price of $270,000 that was estimated by the dissenting shareholders? 4. What is the maximum share price at which Herbert Kohler should be willing to settle with the dissenting shareholders in order to stop the trial on April 11, 2000? Assume that: (i) If the trial proceeds, it is expected to last less than a month and to result in one of two outcomes in terms of the price per share established in court: the $273,000 being claimed by the plaintiff, or the $55,400 being defended by Herbert Kohler;

(ii) Herbert estimates the probabilities of the two outcomes are 30% and 70%, respectively. 5. How would your answer to (4) change if you also assume (i) the inheritance tax owed on Frederic Kohler’s estate was 50.2% of his holdings in Kohler Co.; (ii) the taxes paid on the estate amounted to $27 million (489 shares at $55,400 each) (iii) the IRS is likely to demand a similar valuation for its claim on Frederic’s estate if the trial result in a revised share price in excess of $55,400; (iv) Herbert Kohler estimates the probability of IRS’s demand at 100% if he proceeds to the trial, and 50% if he settles. Radio One

1. Why does Radio One want to acquire 12 urban stations from Clear Channel Communications in the top 50 markets along with the nine stations in Charlotte, NC, Augusta, GA, and Indianapolis, ID? What are the benefits and risks? 2. What price should Radio One offer based on a discounted cash flow analysis? Are the cash flow projections reasonable? 3. What price should Radio One offer based on a transaction and trading multiples analysis? 4. Assuming that Radio One’s stock price is 30X BCF, can it offer as much as the 30X BCF for the new stations? 5. What should Radio one offer for the new stations?

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