Kohler Case Study

I. Enterprise Value of Kohler

Tax Rate = 34%
Debt to Value = .464 or 681,038/1,467,373
Debt to Equity = .536 or 786,335/1,467,373
Risk Free Rate = 20 yr government bond = 6.0%

Market Return on Debt = 6%
Market Return on Equity = 2002 Net income/ Average Stockholder’s equity 1998-2002 108,229/924,800= 11.7%
WACC: (1-.34)*(.06)*(.464)+ (.117)*(.536)= 8.11%

II. Estimated Share Price of Kohler - $55,400 vs. $270,000

The $55,400 price per share is an undervalued figure because it is presuming that Kohler will remain a private company in the future with the same ownership structure that it presently maintains. After analyzing the projected balance sheets, projected income statements, and projected …show more content…

Price: $273,000 Probability: 30% Expected: $81,900
Price: $55,400 Probability: 70% Expected: $38,780 Total Expected Cost per Share: $120,680

IV. Maximum Share Price in Settlement with IRS Consideration

Herbert Kohler assumes a 100% probability of the IRS taking action if there is no settlement and the case goes to trial. If there is settlement there is a 50% probability that IRS will claim taxes on Federick’s estate. Outcome without Settlement - 100% Probability of IRS Tax

If the case goes to court and the shareholders would claim $237,000 per share on the 489 taxable shares. There is a 30% probability that the new taxable shares will result in an expected tax increase of $40,049,100 if this is the outcome in court. If the court finds in favor of Herbert Kohler, declaring $55,400 per share and there would be no additional taxable shares. When looking at the two outcomes, the expected extra tax is the expected tax if the court finding in favor of the shareholders, $40,049,100 plus the expected tax if the court finds in favor of Herbert Kohler, $0, minus the taxes already paid, $27,000, resulting in $13,049,100 if the case goes to court.

Outcome with Settlement - 50% Probability of IRS Tax

If there is a settlement and the case does not go to court, the calculated cost per share is $120,680, plus a tax on 50% of Federic Kohler’s shares (489 shares). The estimated probability that the IRS