Discussion Questions:Please provide an articulate, professionally structured, and theoretically sound answer. Answers needto be supported with examples from the texts and Exhibits. This may require some due diligence onyour part.1. How much business risk is associated with Sterling’s proposed acquisition of the germicidal,sanitation, and antiseptic products unit of Montagne Medical? Be sure to define business risk inyour answer.
2. Verify the growth rates for sales and inflation (cost of goods sold, COGS) that are described inthe case. This can be calculated from the income statement (Exhibit 1). An excel sheetcontaining the information described in the case can be found on Blackboard. What is theformula for finding the average compounded growth rate?
3. Find the growth rates for the rest of the items on the Income Statement and Balance sheet. UseSparklines to provide a graphical representation of the trend.
4. List and Describe why Net Income for Sterling has decreased from 2010 to 2012.
5. Describe the five categories of financial ratios. Create a new tab, ‘Financial Ratios’, and calculatethe following ratios for Sterling:Liquidity Solvency Asset
Management Profitability Market Value
Current Total Debt InventoryTurnover
Profit Margin EPS
Quick (Acid Test) Times InterestEarned (TIE)
Days’ sales inInventory
PE
Cash ReceivablesTurnover
ROA Market-to-Book
Days’ sales inreceivables
ROE Market Cap
Total AssetTurnover (TAT)
ROIC Enterprise Value
6. Which firms are most appropriate to use as comparables to Montagne and why?
7. What is the unlevered beta appropriate for estimating the asset/industry risk of Montagne’shealth care infection-control division? (A formula for unlevering beta can be found in Chapter13/18 of the textbook. You will need to use the Balance Sheet Capitalization from Exhibit 7 todetermine the D/E for the appropriate firms)
8. What is formula for CAPM and the appropriate market risk premium and risk-free rate? ShouldSterling focus on a short-term or long-term risk-free rate? Why?
9. Explain what the correct capital structure and weighted average cost of capital for discountingthe investment’s free cash flow. Assume a 35% tax rate.
10. What is the levered beta appropriate for estimating the asset/industry risk of Montagne’shealth care infection-control division?
11. What is the cost of equity capital appropriate for evaluating the free cash flow associated withthis investment? A correct response requires that you find an appropriate industry beta andmeasure for levered/unlevered betas and requires that you define cost of equity capital andfree cash flow (FCF) – you may need a formula for FCF.
12. What is an appropriate cost of debt? Explain the reasoning for the change in cost of borrowedfunds. Explain and determine the credit spread.
13. Estimate Sterling’s project specific cost of capital. A correct response requires that youdetermine and define capital structure and Weighted Average Cost of Capital (WACC) with aformula. (When defining a term with a formula be sure that all the variables are also defined).
14. Explain why it is best practice to estimate cost of capital based on comparable and target D/Erather than using the existing WACC.
15. What are the amounts and timing of the acquisition investment’s free cash flows from 2013through 2022? You will need to find an appropriate growth rate and extend Exhibit 6 outthrough 2022. (As long as you understand the formulas for each line, you can drag the formulaacross).
16. What is the terminal value of the final 10 years of the acquisition, as of 2022 (Years 2023-2032)?An appropriate multiplier can be found in the case body literature.
17. What is the formula for the Present Value (PV) for a finite stream of growing cash flows (1 peryear) that lasts for 10 years?
18. How close does the terminal value in Question 16 get to the present value using the growingannuity formula in Question 17?
19. What is the Present Value (NPV) to Sterling of the base investment using FCF for 2013-2033using the WACC you found in question 13 instead of the 6.8% used in cell C38? You will need tocomplete the worksheet proforma on the ‘Forecast’ tab out through year 2022 consistent withthe parameters in the case document.a. Explain the formula used for annual depreciation expense (row 7).b. Explain the formula in row 35. Be sure to account for the terminal value (row 33) in thefinal year of the proforma i.e. 2022.i. Why do we need to account for CAPX?ii. Why do we need to account for increase in NWC?c. Confirm that these amounts under the ‘Assumptions,’ B21:B24, are in line withhistorical firm averages. Explain the derivation of these values (% of Sales)?20. What are the amounts and timing of the follow-up expansion investment opportunity’s freecash flow from 2013 through 2022? Complete the pro forma on the ‘Expansion’ tab consistentwith the parameters in the case document.
21. What is the terminal value of the final 10 years of the follow-up acquisition, as of 2022?
22. What would the terminal value be if the formula for an annuity were used with a 2.2% growthand 6.8% WACC?
23. What is the net present value of this follow-up investment and the combined base andexpansion investments?
24. Is the acquisition of Montagne Medical’s germicidal, sanitation, and antiseptic products unitvalue-additive to Sterling? Elaborate and Explain.