DuPont Corporation: Sale of Performance Coatings

2017 ◽  
pp. 1-22
Author(s):  
Susan Chaplinsky ◽  
Felicia C. Marston ◽  
Brett Merker
Keyword(s):  
Corporate Finance ◽  
Private Equity ◽  
Cash Flows ◽  
Base Case ◽  
Entrepreneurial Finance ◽  
Present Value ◽  
Elective Course ◽  
Second Year ◽  
Free Cash Flows ◽  
Adjusted Present Value

In January 2012, Ellen Kullman, CEO and chairman of DuPont, must decide whether to retain or sell the company's Performance Coatings (DPC) division. This is an introductory case on valuing a leveraged buyout. The case focuses on a publicly listed corporation's decision to divest a large division and asks students to compare the division's value if it remains under DuPont's control or is sold to an outside party. The transaction size of approximately $4 billion is too large for potential strategic buyers in the industry, making private equity (PE) firms the most likely bidders. The case provides a base-case adjusted present value (APV) model of DPC as a stand-alone company and gives students specific assignments to adjust it to reflect the division's potential value under PE ownership (e.g., EBITDA growth, multiple arbitrage, and increased leverage).The case is designed to illustrate and discuss the differences between a public company's valuation based on unlevered free cash flows and a PE sponsor's valuation based on residual (levered) cash flows.This case has been successfully taught in a second-year elective course covering entrepreneurial finance and private equity and in an advanced undergraduate course on corporate finance. It is appropriate for use in classes on private equity, advanced corporate finance, or deal valuation.

scholarly journals The lifecycle of the firm, corporate governance and investment performance

2014 ◽  
Vol 11 (2) ◽  
pp. 224-238 ◽  
Author(s):  
Jimmy A. Saravia Matus
Keyword(s):  
Corporate Governance ◽  
Agency Costs ◽  
Net Present Value ◽  
Cash Flows ◽  
Present Value ◽  
Investment Performance ◽  
Empirical Results ◽  
Free Cash Flows

According to firm lifecycle theory the agency costs of free cash flows are not transitory problems but are a persistent issue for mature firms. This paper extends the theory by suggesting that to neutralize the threat of takeover the controlling parties of maturing firms progressively deploy antitakeover provisions, and this allows them to overinvest safely and prevent retrenchment. Another contribution of this paper is to develop a new empirical index that permits the identification of mature corporations with governance problems due to agency costs of free cash flows. Empirical results show that as firms mature free cash flows increase, more antitakeover provisions are put into place and negative net present value projects are undertaken.

scholarly journals Adjustment of the WACC with Subsidized Debt in the Presence of Corporate Taxes: The Finite-Horizon Case

2020 ◽  
Vol 12 (2) ◽  
pp. 45
Author(s):  
Ignacio Vélez-Pareja ◽  
Joseph Tham ◽  
Viviana Fernández
Keyword(s):  
Weighted Average ◽  
Cash Flows ◽  
Debt Financing ◽  
Cost Of Debt ◽  
Tax Shield ◽  
Market Rate ◽  
Tax Savings ◽  
The Cost ◽  
Free Cash Flows ◽  
Adjusted Present Value

When discounting free-cash flows (FCF) at the Weighted Average Cost of Capital (WACC), we assume that the cost of debt is the market, unsubsidized rate. With debt at the market rate and perfect capital markets, debt only creates value in the presence of taxes through the tax shield. In some cases, the firm may be able to obtain a loan at a rate that is below the market rate. With subsidized debt and taxes, there would be a benefit to debt financing, and the unleveraged and leveraged values of the cash flows would differ. The benefit of lower tax savings are offset by the benefit of the subsidy. These two benefits have to be introduced explicitly. In this article, we present the necessary adjustments to the WACC and the cost of leveraged equity under the existence of subsidized debt and taxes in a multiple-period setting. We analyze the cases of the WACC applied to the FCF and the WACC applied to the capital-cash flows (CCF). We also utilize the Adjusted Present Value (APV) to consider both the tax savings and the subsidy. We show that all these different approaches give the same answer.

Board diversity and firm risk-taking in the tourism sector: Moderating effects of board independence, CEO duality, and free cash flows

2021 ◽  
pp. 135481662110143
Author(s):  
Ozgur Ozdemir ◽  
Ezgi Erkmen ◽  
Fatemeh Binesh
Keyword(s):  
Risk Taking ◽  
Composite Index ◽  
Cash Flows ◽  
Board Independence ◽  
Firm Risk ◽  
Board Diversity ◽  
Ceo Duality ◽  
Reduction Effect ◽  
Task Oriented ◽  
Free Cash Flows

This study examines the effect of board diversity on risk-taking for tourism firms and analyzes the moderating effect of board independence, CEO duality, and free cash flows in this proposed relationship. Using a composite index of board diversity and a sample of tourism firms from the US hotel, restaurant, and airline industries, we find that greater board diversity leads to lower risk-taking, measured in standard deviation of return on assets. Moreover, we report that the risk-reduction effect of board diversity is more profound when tourism firms have less board independence and less free cash flows for investments. When board diversity is decomposed into relation-oriented and task-oriented diversity attributes, we find that only the task-oriented diversity is influential in reducing firm risk-taking for tourism firms. Akin to main analysis, the board independence and free cash flows are significant moderators of the relationship between task-oriented diversity and firm risk-taking.

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