Valuation for Mergers and Acquisitions (2nd Edition) by Petitt Barbara S. & Ferris Kenneth R

Author:Petitt, Barbara S. & Ferris, Kenneth R. [Petitt, Barbara S.]
Language: eng
Format: epub
Publisher: Pearson Education
Published: 2013-06-26T21:00:00+00:00

4. Calculate the average unleveraged beta for the group of comparable companies (βU*).

5. Assuming that the target’s unleveraged beta is equal to the industry’s average unleveraged beta, estimate its leveraged beta. To do so, the effect of the target’s financial leverage (considering the interest tax shield) must be included as follows:

A third method is simply to use the industry beta, which is typically more stable and reliable than company betas. A rule of thumb some analysts follow is to use the industry beta if the target’s beta from several sources varies by more than 0.2, indicating a high degree of instability and potential unreliability in the target’s beta.

5. How can I estimate the capitalized value of operating leases, and how does it affect the calculation of a company’s WACC?

Most debt instruments are reported in the balance sheet, and so are capital (or finance) leases. In contrast, operating leases are carried off balance sheet. Thus, the analyst must be able to capitalize the present value of the future operating lease payments to the balance sheet. Operating lease payments are usually disclosed in the footnotes to the financial statements, so estimating the capitalized value of operating leases is relatively straightforward: It requires discounting the future operating lease payments. Most analysts use the company’s long-term cost of debt (or the average rate implicit in the leases, if known).

Let us return to the example of Pinnacle Peak Corporation presented in Exhibit 3.3. Assume that a review of the footnotes reveals that the company has operating leases carried off balance sheet and that the implicit cost of lease financing is 8 percent. The future operating lease payments are as follows:

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