Delta’s equity value
Question 1
Delta Inc.
- What is a reasonable estimate of Delta’s equity value at December 31, 2017?
- The value date is December 2017
Two similar publicly traded similar firms have (i) no debt; and (ii) a cost of equity of 13% and 15% (essentially their unlevered pre tax WACC return). However, Delta has debt, and its long-term constant D/(D + E) ratio is 0.16. Use debt rate of 5%.
For the DCF method, use these projections, which are in millions. The FCFE projections include income taxes at a 40% rate.
| Projections | 2018 | 2019 | 2020 | 2021 | 2022 | |
| EBITDA | 40 | 43 | 46 | 41 | 49 | |
| Free cash flow to Delta equity after debt service | 15 | 16 | 22 | 14 recession | 24 |
Sale Price in 2022: For the December 31, 2022 terminal enterprise value (TV), you will (a) assume a competitor buys Delta at a ratio of 8x EV/EBITDA in December 2022. On that date, net debt is zero.
Question 2:
- You are working with Triton Inc., a low-tech, call center services firm with $135 million in revenue over the last 12 months.
- Triton info:
- EBITDA was $11 million for last 12 months;
- EBITDA was consistently profitable the last five years;
- EBITDA growth rate is 12%.
- The chart has pricing on similar firms sold in M&A deals.
- What is your estimate of the value of Triton in an M&A deal? Use n EBITDA ratio of your choice and explain. Triton has net debt of zero.
| M&A Deal: Buyer/Target | Date | EV/Sales | EV/EBITDA | Target growth rate |
| Tel/Orange | 8/2022 | 1.4x | 10.4x | 9% |
| SPAC/List | 2/2022 | 1.8x | 12.1 | 10 |
| ITT/Lars | 9/2022 | 1.7x | 9.3 | 7 |
QUESTION 3:
Tell Inc. is a publicly traded, low-tech firm, and it has a profitable record over the last 10 years.
Tell earnings growth growth was below the average of US publicly traded companies, and Tell’s stock trades at a below-average P/E. multiple.
Tell has not paid a cash dividend over the last 10 years.
The company has $200 million in cash on its balance sheet. Total assets are $1 billion. Tell has no debt on its balance sheet. (i.e., all equity or negative ‘net debt’.)
Tell announces a new cash dividend of $10 million per year, and, at the same time the company announces a $100 million share repurchase immediately.
Provide at least two (2) reasons for why Tell Inc. made this decision. No calculations are required.
