Based on our financial projections for free cash flow and weighted average cost of capital we do recommend that you bid on Pinkerton. Based on our calculations the combined value that Pinkerton brings, taking into consideration the synergies between the two firms, is around $101.84 million. If you were to bid this amount, we would have a zero NPV.
This figure is based on the best case scenario projections that the financial analysts put together. In addition, we used the debt-to-equity ratio and equity beta of Wackenhut to calculate the WACC for our DCF. In order to do this, we assumed that the debt rate was at the risk free rate of 8.58%. We first used the Wackenhut equity beta to calculate asset beta. We then took the asset beta and plugged it into CAPM with an assumed 7.5% market risk premium with an 8.58% risk free rate to get a rate of 14.65%. We then took this rate and used the equity rate equation to find the equity rate for our WACC formula. Once we finished the calculations, we ended up with a WACC of 13.99%.
The reason why we used Wackenhut’s financials is because of the assumption that the new combined Pinkerton and CPP firm would equal the size of Wackenhut. They are in the same industry, so we can assume that they are comparable. Because of this, we are able to pull beta and debt to equity ratios to do our WACC calculations to discount the new firms.
In doing the discount, we first projected the next 5 years and discounted them back. We then used the perpetuity growth method to calculate the projected free cash flows for the years after the first 5 years. We then took this number and discounted it back adding it to the initial first 5 years. We did this for both CPP and Pinkerton and added the net potential change in CPP’s revenue with the acquisition to the best case of Pinkerton’s financial data, accounting for synergies with the acquisition.
We have also included a sensitivity table to both the best View More »