NEWGRADE ENERGY INC.
Blair Swystun, the Senior Vice-President and Chief Financial Officer of Crown Investments Corporation of Saskatchewan (CIC), was faced with a challenging decision. CIC was contemplating the sale of its fifty percent (50%) interest in a heavy oil upgrader, NewGrade Energy Inc. (NewGrade), and wanted an assessment of the worth of the company. To obtain a reasonable estimate, Swystun has instructed an independent adviser with expertise in the industry to provide input. In addition to receiving an estimate of value, Swystun also needed to formulate a strategy for selling off the company.
The learning objectives include:
How to value a company utilizing the free cash flow method, the comparables method and the precedent transactions method
Strategies for arranging a strategic sale
Based on your analysis, please answer the following questions. The quality of the case analyses should be based on the originality and rigor of the answers provided for the questions related to the case and the thoroughness of the power point presentation documents. The groupss also need to do adequate outside research to complement their findings and analyses.
1. Describe the various constraints of the valuation faced by NewGrade.
2. Describe the calculation underlying the Free Cash Flow to the Firm Method utilizing
a. The Value of the Firm using Free Cash Flow
b. The Cash Flow Forecast
c. The Capital Structure
d. The Cost of Capital
i. The Capital asset Pricing Model
ii. Beta of Comparable Companies
iii. Adjusting the Beta for Leverage
iv. Cost of Equity
v. Adjusting for an Illiquidity Premium
vi. The Cost of Debt
vii. Weighted Average Cost of Capital
e. Valuation Using Discounted Cash Flow
Describe the Valuation using Comparables Method
Describe the Valuation using Precedent Transactions Method
As the adviser to Swystun, assess the value of CIC’s equity interest in NewGrade by employing the free cash flow method with no debt, free cash flow method with 25% debt, the comparables method and the precedent transactions method.
What is the average valuation of NewGrade?
Which strategy should Swystun employ in selling the company?
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