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Va|ue Ana|ys|s

Iormu|a
v
L
v
C
+ 1
C
u f(u)
Method
1 calculaLe Lhe flrm value of Sealed Alr CorporaLlon wlLhouL leverage
2 calculaLe Lhe flrm value v
L1
before Lhe recaplLallzaLlon
3 calculaLe Lhe flrm value v
L2
afLer Lhe recaplLallzaLlon
4 1he dlfference beLween v
L2
and v
L1
ls Lhe value creaLed from recaplLallzaLlon
1he value of nonleveraged flrm v
C

EBIT(1-t)
R
e
MarkeL value 8243*43
7
8
37824
ear Debt(m||||on)
1988 333
1989 3111

v
L
v
C
+ 1
C
u f(u) v
C
+ 1
C
u (probablllLy of bankrupLcy* cosL of bankrupLcy)
v
C
+ 1
C
u (probablllLy of bankrupLcy*g* v
C
)

g ls consLanL beLween 2330 here we use 273

1Interest coverage method

lnLeresL coverage raLlo fuLure flve year average L8l1/ lnLeresL 80/284 28

Year EBIT Bank borrowing Note Total interest
1989 59.82 8.764642857 12.5
1990 66.64 12.2705 21.5
1991 74.24 10.511 21.5
1992 82.70 8.7515 21.5
1993 92.13 6.4975 21.5
1994 102.64 3.4845 21.5
Average 80.00 28.4
1herefore afLer recaplLallzaLlon we glve lL 8+ raLlng Lhe correlaLe defaulL raLe ls 1928 We
suppose Lhe defaulL raLe ls equal Lo Lhe probablllLy of bankrupLcy

8ond |e|d spread method
For smaller and riskier firms
If interest coverage
ratio is
greater than _ to
Rating
is Spread is
12.5 100000 AAA 0.50
9.5 12.499999 AA 0.65
7.5 9.499999 A 0.85
6 7.499999 A 1.00
4.5 5.999999 A- 1.10
4 4.499999 BBB 1.60
3.5 3.9999999 BB 3.00
3 3.499999 BB 3.35
2.5 2.999999 B 3.75
2 2.499999 B 5.00
1.5 1.999999 B- 5.25
1.25 1.499999 CCC 8.00
0.8 1.249999 CC 10.00
0.5 0.799999 C 12.00
-100000 0.499999 D 15.00

1he average lnLeresL raLe of Amerlca ln 1989 ls 9 And Lhe acLual raLe of Lhe noLe ls 12623 So
we can geL Lhe yleld spread whlch ls equal Lo 12623 9 3623 Accordlng Lo Lhe Lable we
can glve Sealed alr 8+ raLe 1hen we can know Lhe defaulL raLe of Sealed alr ls 1928

Bong rating DeIault rate
D 100
C 80
CC 65
CCC 46.61
B- 32.50
B 26.36
B 19.28
BB 12.20
BBB 2.30
A 1.41
A- 0.53
A 0.40
AA 0.28
AAA 0.01
ca|cu|ate the va|ue created by recap|ta||zat|on
1he va|ue before recap|ta||zat|on
v
L1
MarkeL value of equlLy + MarkeL value of uebL 8243*43
7
8
+ 333 37824+333 41374
v
L1
v
C
+ 1
C
u f(u) v
C
v
L1
1
C
u + f(u) 41374 333*33 40132

8ecause before Lhe recaplLallzaLlon Lhe amounL of debL ls very small Lhe probablllLy of
bankrupLcy ls small so Lhe cosL of bankrupLcy ls small 1hen we lgnore Lhe f(u) before
recaplLallzaLlon

8ecause Lhe company use parL of lLs cash Lo pay Lhe dlvldend so Lhe v
C
afLer recaplLallzaLlon
should mlnus 213 mllllon
1he va|ue after recap|ta||zat|on
v
L2
v
C
+ 1
C
u f(u) 401323 213 + 33*3111 273*1928*37824
380+108883 2003 46884
Va|ue created v
L2
v
L1
46884 41374 331

Conc|us|on
We glve Sealed alr 8+ raLlng Lhe probablllLy of bankrupLcy ls 1928 And Lhe value creaLed by
recaplLallzaLlon ls 331 mllllon


cap|ta| expend|ture constra|nt ana|ys|s

1hough Lhe consLralnLs can make Lhe managemenL board Lo use Lhe cash efflclenLly and
conservaLlvely we suppose Lhe consLralnL on Lhe caplLal expendlLure ls bad for Lhe company 1he
consLralnL on Lhe caplLal expendlLure consLralns Lhe expansion of the company. And from the
bellowing table we could find that the company has extra money after using limits of caplLal
expendlLure So Lhe company can negoLlaLe wlLh Lhe bank Lo lmprove Lhe llmlLs of caplLal
expendlLure

We Lhlnk Lhe company can successfully renegoLlaLe wlLh Lhe bank abouL Lhe covenanL 1he
reasons are as follows
1 lrom Lhe lncome sLaLemenL from19871989 we forecasL Lhe fuLure 3 years neL sales L8l1
and L8l1uA
Year income statement 1990 1991 1992 1993 1994 1995
Net sales 428.89 477.79 532.26 592.94 660.53 735.84
Cost of sales -279.06 -310.87 -346.31 -385.79 -429.78 -478.77
Gross profit 149.83 166.92 185.94 207.14 230.76 257.07
EBDTA 77.87 86.75 96.64 107.65 119.93 133.60
EBT 59.82 66.64 74.24 82.70 92.13 102.64
D&A 18.05 20.10 22.40 24.95 27.79 30.96
"Cash" EBDTA
85.78 95.56 106.45 118.59 132.11 147.17
And accordlng Lo Lhe arrangemenL of paylng lnLeresL and prlnclpal of bank borrowlng and
noLe we forecasL Lhe fuLure cash expense ln Lhe fuLure years

bank borrowing Note
Year
Principle
repay nterest nterest
nterest expense
(Debt1+2) constraint
Total
expense EBT
cash
EBTDA
1989 30.00 8.76 15.33 54.10 54.10 59.82 85.78
1990 0.00 12.27 21.46 33.73 7.00 40.73 66.64 95.56
1991 15.30 10.51 21.46 47.27 8.00 55.27 74.24 106.45
1992 15.30 8.75 21.46 45.51 9.00 54.51 82.70 118.59
1993 19.60 6.50 21.46 47.56 10.50 58.06 92.13 132.11
1994 26.20 3.48 21.46 51.15 12.00 63.15 102.64 147.17
1995 30.30 0.00 21.46 51.76 12.50 64.26 114.34 163.95

We can flnd LhaL Lhe L8l1 and cash L8l1uA are larger Lhan Lhe LoLal expense 1herefore we have
sufflclenL evldence Lo prove Lhe company can successfully renegoLlaLe wlLh Lhe bank abouL Lhe
covenanL

2 1he pollcy of company has Lurned Lo maklng cash flow 1he company Lakes several measures
such as conducLlng WCM maklng cash flow Lhe second prlorlLy and new bonus plan 1he
growLh raLe of sales ls abouL 114 1he L8l1 margln ls lncreaslng from 119 ln 1987 Lo 139
ln 1989

Concluslon
1he consLralnL on Lhe caplLal expendlLure ls bad for Lhe company And Lhe company can
successfully renegoLlaLe wlLh Lhe bank abouL Lhe covenanL

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