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Silver Sales Company Case Solution
The controlling interest in Silver sales company is owned by Frank Ring who is the president and CEO of Ring Manufacturing and owns 62% per equity in the Silver Sales company. The controlling interest in the Silver Sales company allows Ring to exercise significant influence over the company’s action. Shareholders who have a controlling interest are able to navigate the strategic direction of the company and direct the course of the company’s operational decisions (Ronen, 2006). In this regard, the UK company may not have enough influence over the company’s operations if it decides to purchase 31% equity of Silver Sales. Moreover, the exit options for UK companies are limited after holding its investment for few years in Silver Sales company since upon exit the controlling interest of Ring may not allow the UK company to profit from the sale of the equity, merger, or any other change in ownership.
Following questions are answered in this case study solution
Would the U.K. company willing to buy Silver’s 31 percent of the company given Ring’s 62 percent controlling interest and Ring Manufacturing’s ownership of the intellectual property?
Silver Sales Company owns the license to sell Ring Manufacturing-manufactured Silver Sales Company flow meters in perpetuity, but what is the value of this relationship? How critical is the exclusive nature of this relationship to the estimated value of Silver Sales Company?
What is the value of Silver Sales Company?
How long can Silver Sales Company continue to grow without new cash infusion?
How fast could it grow with new cash infusion?
If the U.K. company was willing to buy Silver Sales Company, how could it structure a deal that Ring would be willing to accept? Would Ring be willing to reduce his equity in Silver Sales Company to less than 50 percent?
What might happen to Silver’s job in some new alliance?
Case Analysis for Silver Sales Company
2. Silver Sales Company owns the license to sell Ring Manufacturing-manufactured Silver Sales Company flow meters in perpetuity, but what is the value of this relationship? How critical is the exclusive nature of this relationship to the estimated value of Silver Sales Company?
The Silver Sales company owns the license to sell Ring Manufacturing’s product in perpetuity. This relationship has value for both companies. As per the information given in the case, during 2000 the company sold wastewater flow meters out of which 25% were manufactured by Ring Manufacturing. Therefore, if one-fourth of the Silver Sales revenue comes from the sale of Ring Manufacturing’s product. Since the revenues are the first step in determining the free cash flows to the equity holder of the company which is extremely critical for the valuation of any company (Porter & Lemke, 2020). Since the future cash flows for equity holders will be less than they would have been with the license to sell the Ring’s Manufacturing product in perpetuity. As a result, the trade relationship with Ring manufacturing may affect 25% of the silver sales cash flows thereby undermining the free cash flows to equity. Therefore, the valuation of the company may not be optimized if the Silver Sales company loses this license.
3. What is the value of Silver Sales Company?
There are various methods that Silver can use to calculate the market value of Silver Sales company. The valuation method includes discounted cash flow and market multiple approaches. Through discounted cash flows, Silver can adjust the project revenue forecast made by the CFO to determine the free cash flows to the equity holders for the next five years. The cost of equity for Silver Sales company is required to calculate the present value of the cash flows. The cost of equity can be determined using the capital asset price model which states that the cost of equity is the sum of the risk-free rate and the market risk premium adjusted by Beta (ACCA Global, 2020). The discounted cash flows would result in the market value of equity. Secondly, market multiples including revenue & EBITDA multiple may be used to determine the value for Silver Sales however the multiple approaches are reliable only if the multiples originated from the transaction from companies in the same industry (Goedhart, Wessels, & Koller, 2005). As per the balance sheet for FY2001, the book value of Silver Sales is negative $170 Million which may require shareholders’ attention to explore reasons for the negative balance.
4. How long can Silver Sales Company continue to grow without new cash infusion?
Silver Sales company needs cash infusion right away as evident by the latest balance sheet of the company for FY2001 which shows a negative balance for equity amounting $170 Million. The cash flow problems are created by the long selling cycle of wastewater flow meters which extend to many days. As a result of the long cash cycle of the business, the working capital requirement of a business increases as the company is unable to recover cash from operation in a timely manner (Brown, 2019).
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