Yeats Valves

7 Pages 1795 Words

Introduction
Yeats Valves and Controls Inc., founded in 1980, went public in 1987, specializing in the manufacturing of specialty valves, heat exchangers, and other engineering work. Since Yeats has a strong reputation of engineering excellence, 40% of the company’s volume and 50% its profits comes from highly-technical defense and aerospace applications funded by the United States government. With this, Yeats has been able to offset the decline of sales due to the foreign-currency crisis of the last past decade, and is very optimistic that this will continue in the future.
Since Yeats is lacking a large marketing and distribution network, Bill Yeats, CEO, believes that selling the firm to a larger company would be very beneficial. Also Yeats is afraid of being driven out of the market by the amount of large consolidations in the industry by his competitors. In addition, Bill is now sixty-two years old and is nearing retirement. He would like to see the firm continue to grow while his services are inactive. Because of these factors Bill Yeats took the initiative to contact Tom Eliot, CEO of TSE International Corporation, a well diversified manufacturing company with production know-how, about the possible acquisition of Yeats Valves and Controls.
Valuation Models

Before Yeats shareholders can set a price for their shares of stock, they must know the value of their firm. The current market value is easy to determine by multiplying the share price by the number of shares outstanding. However, the current share price may not be the true intrinsic value of the firm.
One way of determining value is the discounted cash flow method. Future sales are estimated as well as the free cash flows resulting from these sales. If all future cash flows are discounted back to today at an appropriate required rate of return, the summation of these discounted flows would be the intrinsic value of the firm.
The discount rate is most of...