100% Debt-Funded Purchase Strategy

I would recommend financial strategies # 2 – $100 million purchase price funded by 100% debt. (This is before I did free cash flow forecast for # 9). It will provide the highest tax shield of $17. 49 million for CPP. In addition, Pinkerton has the highest value of $107. 34 million under this strategy. 7. Below is the balance sheet after CPP and Pinkerton acquisition. * CPP market value leverage ratio is 7. 46% and book value leverage is 14. 69% before acquisition. * After acquisition, with $75 million debts, the market value leverage ratio is 52. 9% and the book value leverage ratio is 64.

49%. * After acquisition, with 100 million debts, the market value leverage ratio is 69. 95% and the book value leverage ratio is 85. 14%. 8. Below is the transaction of loss equity. CPP receives $25 million from the bank but gives up $32. 58 million to the bank for the promised 45% equity after acquisition. The cost of doing equity issue is $7. 58 million. Equity Issue with $ 75 million debt| Value of Combined CPP| 147. 4| Minus Long term debt| 75| Equity| 72. 4| Minus 45% to banks| 32. 58| CPP receive| 25| Loss| 7. 58| 9.

From the expected cash flow table below, CPP has extra free cash flow by financing $75 million debt compare to financing 0 million.

Both strategies provide positive free cash flow for the next five years. From the Pessimistic cash flow table below, CPP has more cash flow by financing $75 million debt compare to financing $100 million. $75 million debt strategy provides positive cash flow for the next five years. On the other hand, $ 100 million debt financing will lead to negative cash flow on the fourth and fifth year. 10. * I would recommend Tom Wathen to bid on Pinkerton.

The acquisition with Pinkerton will create synergy and bring incremental free cash flow to CPP.

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According to the valuation, the value of CPP is about $ 41. 53 million and the value after acquisition will increase to $147 million. * Initially, CPP bided $85 million but was rejected. From the valuation, Pinkerton is worth $108 million (include incremental value) at the expected value and $85 million (include incremental value) at the pessimistic value. If you take the average of $108 million and $85 million it comes to $96 million. Therefore, I would recommend Wathen to bid $96 million.

Market Value Leverage Ratio

This would ensure that Wathen’s bid would come in at the right price and not be lower than other bidders. * After doing the free cash flow forecast for the next five years there was negative cash flow with $100 million debt in pessimistic period. Wathen should finance $96 million with 75% in debt ($72 million) and $24 million in equity in exchange for 31 % of the equity in the new combined firm. By doing this, it will ensure no equity loss to the bank. In addition, with $72 million in debt and $24 million in equity will ensure no negative cash flow when the economy is bad (in pessimistic period).