Brady Corporation creates identification solutions for customers to comply with regulations, improve communication and enhance security. They requested that the Nicholas Center for Corporate Finance and Investment Banking students review their valuation model. Brady had used it in the same form for quite some time with only minor modifications. As a part of this review, they wanted an in-depth review of their cost of capital. Specifically, they wanted to know when and where they should use different cost of capital calculations with a proposal on how to implement changes to the cost of capital. In addition, they wanted to know what the cost of capital was for their competition. After getting this basic information regarding the model, the Nicholas Center students were to make recommendations for changes to the dividend policy, share repurchases, acquisitions, and capital investment policy. Finally, they wanted a calculation of the implicit earnings growth rate built into the market valuation.
Andrea Atehortua and her team first attacked the cost of capital calculation by looking at the cost of equity and Beta values for Brady Corporation. The team found a couple of useful items during this phase of the project. Brady was not accounting for exchange rate risk and multiples were not accounted for. They developed examples of how and why to account for the exchange rate risk and the multiples. The results of the project were presented to the CFO and Treasurer of Brady. The model the team developed will help Brady account for these risks in future acquisitions.
Advent-Morro Equity Partners (Miradero Capital) is an equity firm in Puerto Rico with $110 million in capital under management in three funds. The firm has a joint venture with Advent International Corporation based out of Boston. Advent-Morro believes that the U.S. Hispanic markets continue to have viable private equity investment opportunities. They came to the Nicholas Center looking for validation that there are potential opportunities in areas such as healthcare, technology, financial services and consumer goods. The project had two stages to complete. First, the team needed to research background information in the private investment trends in U.S. Hispanic businesses, to identify other private equity firms that compete in this space, to study exit and investment strategies for these firms, and to report on considerations for the management team, market opportunity and financial considerations. In the second stage, the team had to recommend businesses in which to invest, report on the growth prospects, define specific industries, and identify exit strategies, potential returns and legal and regulatory limitations.
John Wakefield and his team started with a basic understanding of demographics in the U.S. They used the U.S. Census from 2002 to find geographies and industries that have high Hispanic interest. After finding this key information, they used the Top 500 Hispanic Business list to identify attractive targets. These targets had a combination of high growth potential in high growth industries, Mexican management, and strong revenue and EBITA results. The team recommended four companies in different industries; Centinel Bank of Taos, David Montoya Construction Inc., Prime Choice Foods Inc., and Mercom, an IT company.
Plexus Corporation creates solutions to customer problems in the Electronic Manufacturing Services industry. They support a variety of market sectors with complex high-tech products for major technology companies. They came to the Nicholas Center for help in determining the cost of capital for overseas acquisitions. Particularly, they were concerned about an acquisition where there is a large difference in the cost of capital between the two companies. Additionally, they wanted the Nicholas Center to determine the cost of capital for acquisitions in developed and developing countries.
Tim Duanmu laid out the strategy for uncovering the answers Plexus desired. First, the team calculated and reconfirmed the domestic cost of capital that Plexus was using. Next, they calculated the cost of capital in Germany, representing a developed country in the team’s model, and the cost of capital in a developing country, Malaysia. The model they developed accounted for exchange rates, inflation, and the stock exchanges in foreign countries. The team utilized a wide breadth of contacts to gather the necessary information from an alumnus in an investment bank in New York to personal friends in Turkey. They presented their final results to the CFO, CTO, Controller, and the treasury department.
National Financial Realty, Inc. Contributory Partnership is a highly complex structure that required a detailed analysis of its impact to corporation’s financial statements. They required a review of the accounting rules that applied to a partnership and any regulatory issues involved. As part of the analysis, an excel template was created to tie the income statement to the balance sheet and finally to the statement of cash flows. Lastly, the team provided an analysis of the ROE/ROA for presenting to a Big Four accounting firm.
Scott Davis and his team first took a step back to question what the key aspects of the problem were. They determined that the big picture of National Financial Realty’s dilemma involved the formation of partnerships, tax law, and banking. They then had to research the necessary tax codes and regulations. As part of the research they contacted the CFO of Johnson Bank, the State of Wisconsin department of banking, and multiple Wisconsin professors with specialties in tax code and banking. Through the process they learned a great deal about the banking environment and the regulations involved in the industry. In the end, the recommendation given to National Financial Realty was not favorable. The team found many regulatory issues the partnership had to address and saved them a great deal of time, research, and money.
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