Microsoft Word - Guidelines for Palamon Capital Case
FIN 4596 Spring 2019
Guidelines for work in Palamon Capital Case
Palamon Capital is a UK-based private equity fund who faces the decision whether to invest in an
Italian software company. Out task is to evaluate the attractiveness of the investment, a valuation
of the target with its new capitalization, and an assessment of the proposed structure. Each team
will use the data in the case file and the attached spreadsheet to answer the following in the
Executive Summary:
1. Talk about your research findings on the Private Equity investing/market (one page,
12 fonts, double-space and normal margins). E.g., Introduce the practice, goals and process
of private equity investing; Compare PE investing attributes with public market investing;
Discuss the diffusion of PE investing practice around the world; Or how important are exit
strategies in the PE market?
This part of summary is general information on PE and should not refer to the Palamon case.
On second and third page, discuss answers to the following questions (#2-6). The answers to #2-
5 should be very short and please focus your discussion on #6. Submit your Excel worksheet as
a separate file as well:
2. What is the equity value of Team Sport using the FCFs and cost of capital (14%) given in
the case? [Note: You need to first find the TV using the perpetuity method and the given FCFs,
g, and r, then find the PV of all the CFs to estimate Firm Value. Equity Value is the difference
etween this Firm Value and Debt (given in case as ITL46 billion in Exhibit 9.)
3. Suppose that comparable firms have a market value debt/equity ratio of 30% and are taxed
at the similar rate as Team Sport. What is the unlevered beta for Team Sport?
4. Compute an unlevered cost of equity for Team Sport using the 10-year Italian government
ond rate and a market risk premium = 8%. Use this discount rate to re-compute the value of the
free cash flows.
5. Compute the annual interest tax shield based on the debt outstanding, tax rate, and cost of
debt capital, ALL of which are given in the case. Then find the present value of this finite series
of annual Tax Shields.
6. Add your answers in #4 and #5 to find the Adjusted Present Value (APV) of the firm. Find
the Equity Value using the same approach as in #2 above. How does this Equity Value compare
to your answer in #2? WHY is it different? How does this Equity Value help the PE investor
optimize their offer and deal structure?
Team Presentations
Two Groups will present their findings for Palamon case. Please start the presentation by sharing
with us the most interesting facts you discovered about the Private Equity investing/market,
and then explain how the APV method helps the PE investor optimize their offer and deal
structure.
Remember to introduce each member, have each member present, be prepared to answer
questions, and limit your presentation to 20 minutes. Remember to address your points to the
assumed Board of directors in the PE firm, make eye contact, and do not simply read the
slide, but communicate your points clearly to the audience.
PRACTICE!!!