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Lisco Acquisition of a Minority Interest of Orion Case Solution

Solution Id Length Case Author Case Publisher
1042 1129 Words (5 Pages) Richard Howard, Kimberley Howard Ivey Publishing : W13232
This solution includes: A Word File A Word File and An Excel File An Excel File

Lisco is a wealth management company based in Chile that provides financial advisory services to the private funds and pension funds. Given the improvements in the political scenario of Chile, a lot of funds began to flow inside Chile and wealthy people and owners of private businesses, with lots of savings, started to look for investment opportunities. Due to this influx of funds and the creation of private funds in Chile, Lisco performed very well. However, the signing of the “Mercado Integrado Latinamericano” Treaty by Chile, Colombia and Peru led a way to the globalization of investments and trading from this region. These developments inspired Ben Gar, the president of Lisco to invest in other countries to expand the market share and to increase the wealth of the business. For this purpose, the company began considering buying 30% stake in Orion, a Columbian venture of the similar nature.

Following questions are answered in this case study solution

  1. Abstract

  2. ​Enterprise Value of Orion

  3. Market Value of Shares of Orion

  4. Risks of Investment

    i. Exchange Rate Risk

    ii. Liquidity Risk

    iii. Opportunity Cost of Investment

  5. Conclusion

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Case Analysis for Lisco Acquisition of a Minority Interest of Orion

Enterprise Value of Orion

Enterprise value of a company is given by adding together the market value of the debt and equity. However, this mode of finding the enterprise value is not applicable for firms whose shares are not traded in the market because of unavailability of the market price of the shares of the company. For such firms, discounted cash flow method is the most accurate method of finding out the enterprise value of the company. In order to find out the enterprise value of Orion, it is necessary to first estimate the free cash flows of the company in the years to come. For the years 2009-2011, free cash flows can be calculated by putting the actual financial statement figures in the following formula.

Free Cash Flow = EBIT (1-T) + Depreciation – Changes in the Net Working Capital – Capital Expenditure

In the case of there are no increases in the non-current assets over the years, rather there is a decrease. This decrease in the value of fixed assets in captured by the depreciation expense and hence, there will be no capital expenditures for all of these years. Using approximately 30% as the tax rate, free cash flows for years 2009, 2010 and 2011 come out to be $2.12 million, -$6.13 million and -$1.75 million. Free Cash flows for years 2010 and 2011 are negative because most of the cash earned by the company is being piled up and the company is reinvesting the cash in the business. For the future cash flows, it may be assumed safely, given the growth of the business that free cash flows will grow at 10% for six years and after year 2017 the free cash flows will grow at 5% forever. The enterprise value of Orion can be found out by discounting these free cash flows at the appropriate discount rate and then adding together all the discounted free cash flows. Since the hurdle rate of return from the perspective of Lisco is the return on equity of 15%, this ROE should be used as the discount rate because it is the opportunity cost of investing in Orion. After doing all of these calculations, the enterprise value of the company comes out to be approximately $21.37 million.

Market Value of Shares of Orion

Since the market value of the debt of Orion is $5.9 million, as mentioned in the latest balance sheet, the market value of equity can be found out as follows.

Market Value of Equity = Enterprise Value - Market Value of Debt

                                           = $21.37 million - $5.9 million = $15.47 million

Let 100 be the number of shares of Orion and Lisco wants to buy 30% shares of the company, value per share of the company can be found as follows.
Value per Share = ($15.47 million / 143) = $110,000 per share.

Therefore, in order to buy 43 shares at 30% premium, Lisco will have to pay $140,000 per share.

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