Lonestar Graphite Case Solution

A discounted cash flow analysis has been conducted to assist HCP in deciding how much equity injection would be required by it based on the Enterprise value of Lone Star. As you can see, there are two scenarios in the two different sheets in the excel file. One is based on Management case pro forma and the other is a downside case that used a conservative approach to growth (a perpetuity growth rate of 0.5 percent). Enterprise value of Lone Star has been calculated for both case scenarios and it is much higher for management case i.e. $243 million as compared to $164 million in case of downside. This means that according to the first case, HCB will have to make an equity investment worth $192 million to acquire Lone Star coupled with $51 million debt. In case of downside, it needs to inject equity worth $113 million. 

Essential point to ponder over here is the Weighted Average Cost of Capital (WACC) that is well below the internal hurdle rate (25 percent) of HCP. This definitely abets an investment worth $192 million but ignores the preferences set forth by HCP regarding equity investment. HCP wants to keep the equity to total transaction value between 15 percent and 50 percent which makes going with downside case more appropriate. Management case demands a debt and equity ratio of 21 to 79 percent respectively. Downside allows a debt and equity breakup of 32 to 68 percent which is closer to the HCP’s preference.