Sterling Acquisition Financial Valuation
Budget: $30 – $250 USD
Objective:
Perform a complete financial valuation, strategic analysis, and investment recommendation for Sterling Household Products Company’s potential acquisition of Montagne Medical’s germicidal products unit. Your work must be both technically accurate and professionally presented — suitable for submission at a master’s-level finance program.
1. Base-Case DCF Valuation (Question 1)
Task:
• Complete a free cash flow (FCF) valuation of the target business for 2013–2022.
• Extend the projections from 2018–2022 based on the company’s 2017 ratios and assumptions.
• Include depreciation, capital expenditure, and changes in net working capital.
• Calculate the terminal value as 9× 2022 FCF.
• Discount all cash flows at 7%.
Deliverables:
• Excel table showing yearly revenue, EBIT, NOPAT, depreciation, CAPEX, ΔNWC, and FCF.
• Total enterprise value (EV), PV of terminal value, and total NPV.
• A short written explanation (2–3 sentences) summarizing the valuation result vs. the $265m offer.
2. Discount Rate Analysis (Question 2)
Task:
• Recalculate the weighted average cost of capital (WACC) based on CAPM.
• Use peer betas from the case (ignore Sterling’s low beta) and justify the beta you choose.
• Assume a 30% debt / 70% equity capital structure and an after-tax cost of debt of 5.1% × (1 – 35%).
• Present the new WACC and explain whether 7% is appropriate.
Deliverables:
• Table showing cost of equity, cost of debt, after-tax cost of debt, and WACC for multiple beta scenarios.
• Final WACC recommendation and a 2–3 sentence justification.
3. Expansion Valuation (Question 3)
Task:
• Model the impact of an optional $60m expansion investment in 2013 plus $0.6m annual maintenance CAPEX.
• Include incremental revenue (+20% in 2014, +30% in 2015, +40% from 2016 onwards).
• Recalculate FCF, terminal value (9× incremental 2022 FCF), and NPV of the expansion.
Deliverables:
• Separate Excel table showing incremental FCF from 2013–2022.
• NPV of the expansion project and PV of incremental terminal value.
• Short commentary on how the expansion affects the acquisition decision.
4. Investment Decision (Question 4)
Task:
• Provide two NPVs:
1. Acquisition without expansion.
2. Acquisition with expansion.
• Compare both NPVs to the $265m purchase price and state a clear investment recommendation.
Deliverables:
• Short written recommendation (4–5 sentences) explaining whether to proceed with the acquisition and under what conditions.
5. Sensitivity Analysis (Question 5)
Task:
Perform sensitivity tests for the valuation under the following Deliverables:
• Excel sensitivity table showing valuation under each scenario.
• A short commentary on which variables most affect valuation and whether the project remains value-creating under adverse assumptions.
6. Qualitative Strategic Analysis (Question 6)
Task:
• Discuss non-financial factors that could impact the success or failure of the acquisition.
• Consider strategic fit, synergies, risks, operational and regulatory factors, competitive dynamics, and execution challenges.
Deliverables:
• A 1–2 paragraph written section summarizing strategic opportunities, risks, and final recommendation integrating both qualitative and quantitative results.
Final Deliverables Checklist
• Excel file with all calculations and sensitivity tables (clearly labeled sheets).
• Word or PDF report (2–4 pages) with answers to all six questions, organized and numbered.
• Final recommendation (clear conclusion based on analysis).
Grading Criteria (How to Get Full Marks)
• Accuracy: All calculations must be correct, with transparent assumptions.
• Depth: Each answer should include not only numbers but also interpretation.
• Clarity: Excel must be clean, labeled, and logically structured.
• Professionalism: Report must read like an investment memo — concise, analytical, and structured.
• Insight: Go beyond the math — explain what the results mean for Sterling strategically.
Perform a complete financial valuation, strategic analysis, and investment recommendation for Sterling Household Products Company’s potential acquisition of Montagne Medical’s germicidal products unit. Your work must be both technically accurate and professionally presented — suitable for submission at a master’s-level finance program.
1. Base-Case DCF Valuation (Question 1)
Task:
• Complete a free cash flow (FCF) valuation of the target business for 2013–2022.
• Extend the projections from 2018–2022 based on the company’s 2017 ratios and assumptions.
• Include depreciation, capital expenditure, and changes in net working capital.
• Calculate the terminal value as 9× 2022 FCF.
• Discount all cash flows at 7%.
Deliverables:
• Excel table showing yearly revenue, EBIT, NOPAT, depreciation, CAPEX, ΔNWC, and FCF.
• Total enterprise value (EV), PV of terminal value, and total NPV.
• A short written explanation (2–3 sentences) summarizing the valuation result vs. the $265m offer.
2. Discount Rate Analysis (Question 2)
Task:
• Recalculate the weighted average cost of capital (WACC) based on CAPM.
• Use peer betas from the case (ignore Sterling’s low beta) and justify the beta you choose.
• Assume a 30% debt / 70% equity capital structure and an after-tax cost of debt of 5.1% × (1 – 35%).
• Present the new WACC and explain whether 7% is appropriate.
Deliverables:
• Table showing cost of equity, cost of debt, after-tax cost of debt, and WACC for multiple beta scenarios.
• Final WACC recommendation and a 2–3 sentence justification.
3. Expansion Valuation (Question 3)
Task:
• Model the impact of an optional $60m expansion investment in 2013 plus $0.6m annual maintenance CAPEX.
• Include incremental revenue (+20% in 2014, +30% in 2015, +40% from 2016 onwards).
• Recalculate FCF, terminal value (9× incremental 2022 FCF), and NPV of the expansion.
Deliverables:
• Separate Excel table showing incremental FCF from 2013–2022.
• NPV of the expansion project and PV of incremental terminal value.
• Short commentary on how the expansion affects the acquisition decision.
4. Investment Decision (Question 4)
Task:
• Provide two NPVs:
1. Acquisition without expansion.
2. Acquisition with expansion.
• Compare both NPVs to the $265m purchase price and state a clear investment recommendation.
Deliverables:
• Short written recommendation (4–5 sentences) explaining whether to proceed with the acquisition and under what conditions.
5. Sensitivity Analysis (Question 5)
Task:
Perform sensitivity tests for the valuation under the following Deliverables:
• Excel sensitivity table showing valuation under each scenario.
• A short commentary on which variables most affect valuation and whether the project remains value-creating under adverse assumptions.
6. Qualitative Strategic Analysis (Question 6)
Task:
• Discuss non-financial factors that could impact the success or failure of the acquisition.
• Consider strategic fit, synergies, risks, operational and regulatory factors, competitive dynamics, and execution challenges.
Deliverables:
• A 1–2 paragraph written section summarizing strategic opportunities, risks, and final recommendation integrating both qualitative and quantitative results.
Final Deliverables Checklist
• Excel file with all calculations and sensitivity tables (clearly labeled sheets).
• Word or PDF report (2–4 pages) with answers to all six questions, organized and numbered.
• Final recommendation (clear conclusion based on analysis).
Grading Criteria (How to Get Full Marks)
• Accuracy: All calculations must be correct, with transparent assumptions.
• Depth: Each answer should include not only numbers but also interpretation.
• Clarity: Excel must be clean, labeled, and logically structured.
• Professionalism: Report must read like an investment memo — concise, analytical, and structured.
• Insight: Go beyond the math — explain what the results mean for Sterling strategically.