Posted: March 19th, 2015

texts and Exhibits

provide an articulate, concise, and theoretically sound answer. Answers need to be supported with examples from the texts and Exhibits. This may require some due

diligence on your part. Please retype the question and your response.
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 in your answer.

2.    Verify the growth rates for sales and inflation (cost of goods sold, CGS) that are described in the case. This can be calculated from the income statement

(Exhibit 1). An excel sheet containing the information described in the case can be found on Blackboard. What is the formula 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. Use Sparklines to provide a graphical representation of the trend.

4.    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 calculate the following ratios for Sterling:
Liquidity    Solvency    Asset Management    Profitability    Market Value
Current    Total Debt    Inventory Turnover    Profit Margin    EPS
Quick (Acid Test)    Times Interest Earned (TIE)    Days’ sales in Inventory    EBITDA Margin    PE
Cash    Cash Coverage    Receivables Turnover    ROA    Market-to-Book
Days’ sales in receivables    ROE    Market Cap
Total Asset Turnover (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’s health care infection-control division? (A formula for unlevering

beta can be found in Chapter 13 of the text.)

8.    What is formula for CAPM and the appropriate risk-free rate?

9.    What is the cost of equity capital appropriate for evaluating the free cash flow associated with this investment? A correct response requires that you find an

appropriate industry beta and measure for levered/unlevered betas and requires that you define cost of equity capital and free cash flow (FCF) – you may need a formula

for FCF.

10.    What is the correct capital structure and weighted average cost of capital for discounting the investment’s free cash flow. Assume a 35% tax rate. A correct

response requires that you define capital structure and Weighted Average Cost of Capital (WACC) with a formula. When defining a term with a formula be sure that all

the variables are also defined.

11.    What are the amounts and timing of the acquisition investment’s free cash flow from 2013 through 2022? You will need to find an appropriate growth rate and

extend Exhibit 6 out through 2022.

12.    What is the terminal value of the final 10 years of the acquisition, as of 2022? An appropriate multiplier can be found in the case body literature.

13.    What is the formula for the Present Value (PV) for a finite stream of cash flows (1 per year) that lasts for 10 years?

14.    How close does the terminal value in part 2 get to the present value using the growing annuity formula in part 3?

15.    What is the Present Value (NPV) to Sterling of the base investment using FCF for 2013-2033?

16.    What are the amounts and timing of the follow-up expansion investment opportunity’s free cash flow from 2013 through 2022?

17.    What is the terminal value of the final 10 years of the follow-up acquisition, as of 2022?

18.    What would the terminal value be if the formula for an annuity were used with a 2.2% growth and 6.8% WACC?

19.    What is the net present value of this follow-up investment and the combined base and expansion investments?

20.    Is the acquisition of Montagne Medical’s germicidal, sanitation, and antiseptic products unit value-additive to Sterling?

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