Value of Operation:-
The terminal value is calculated by using the growth model and the value of operation is determined by using free cash flows for 2014. The required rate of return is 10.14 which is equal to the weighted average cost of capital (WACC). Growth rate is 5% which is assumed and the value of operation is around $25759 millions.
Intrinsic Value:-
Intrinsic value of 84.41 is calculated by the value of operation, it is done by dividing the 25759 by 305 million outstanding shares. By dividing the market capitalisation of 2.71 billion by the market value of shares which is 8.88 the outstanding share are calculated.
Intrinsic value by the P/E ratio method cannot be calculated because the EPS of the company is negative.
Weighted Average Cost of Capital:-
Cost of the long term debt and cost of the equity are used in the calculation of WACC. Cost of the debt is calculated by deducting the interest paid from interest cost and then divided by long-termdebt balance at the end of 2014 Cost of debt is 5.29%. Capital Asset Pricing Model (CAPM) has been used for the cost of equity. Market rate has been assumed to be 12.5%, the risk free rate of return is 3.44% which is equal to 30 year Treasury Bond Rate and the beta is 1.50 which results the cost of equity in 17.85%. WACC is calculated by multiplying the cost of equity and cost of debt by their related weight, which is 10.14%.
Market Value:-
The current market value on New York Stock Exchange is $8.88 per share.
Book Value:-
Book Value is calculated by dividing the share holder equity of $3087 million by 305 million outstanding shares, which is 10.12 per share.
Recommendation:-
The intrinsic value of the company is more than the value of stock exchange, on which the company is running itsbusiness. Other methods for the valuation can be use to enhance the reliability and accuracy of the valuation.JC Penney Company and Kohl’s must negotiate and decide a reasonable price of the shares for the acquisition.
Advantages for JC Penney:-
JC company will enjoy the benefits like increase in efficiency, low competition etc.
So if it acquires the Kohl’sCompany, the company’s efficiency will increase by using the resources and expertise of the experience people of the Kohl’s company.
Reduction in the cost of doing the business will be another benefit for the JC Penny Company.Similar cost for both the companies will be saved, as it will incur only one time for both, such as advertising expenses.
Profitability of the company will be increased by reducing the cost which is same for both the companies. By the help of this the JC Penney can control the selling price according to the market demands.
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