3. We are
Group- 06
SL.No NAME ID (BBA) ID (MBA)
01 Mohammad Rabin Islam 16-013 16-623
02 Md. Sanowar Hossain 16-175 16-609
03 Mahabubur Rahman Khan 16-263 16-766
4. Case Summary:
Saskoil was a Crown corporation that was formed in 1973 to
participate in the exploration, development, production and
transportation of crude oil and natural gas. Since the company‘s
inception, it had been 100 percent owned by the Province of
Saskatchewan. As a Crown corporation, Saskoil was regulated by
the Saskatchewan Oil and Gas Corporation Act. In terms of oil
production, in 1985, Saskoil ranked among the top 20 oil companies
in Canada. On the other hand, Government was particularly
interested in a program to provide the Saskatchewan people with
opportunities to put their considerable savings to work. This huge
savings pool provided an opportunity to develop and expand the
industrial base in Saskatchewan in an attempt to reduce the
significant control from eastern Canada.
5. SWOT ANALYSIS
Strength
enhanced oil recovery
High net earnings and cash flow
Integrated operations
Weakness
govt. objectives must affect the
privatization process.
priority to the Saskatchewan
province people
Opportunities
less government intervention
Increasing demand of oil
alternative sources of energy
Joint venture or collaborations
Threats
Environmental issues
High volatility in the Industry.
Intense competition
SWOT
ANALYSIS
6. Industry Analysis:
Intensity of
rivalry among
firm
HIGH
Threats of
new
entrance
High
Bargaining
power of
suppliers
Low
Threats of
substitutes
Low
Bargaining
power of
Buyers
High
11. Business Risk:
Variability in EBIT
Particulars 1980 1981 1982 1983
Income before income taxes and interest 7469 961 25940 44453
Standard deviation of EBIT 19599.28535
Mean EBIT 19705.75
Variability in EBIT (CV) 99.46%
Degree Of Operating Leverage
Year 1980 1981 1982 1983
Degree of Operating leverage -41415% 3549% 231%
Degree Of Financial Leverage
Year 1980 1981 1982 1983
DFL 1.71 -0.38 1.21 1.08
Interest coverage ratio
Year 1980 1981 1982 1983
Interest coverage ratio (TIE)
2.41 0.28 5.70 13.46
12. Business Risk Cont’d:
Business risk refers to uncertainty of operating income
caused by the firm’s industry. Business risk of Saskoil is
too high compared to its competitors.
Business Risk High
13. Bankruptcy Risk Analysis
2.18 2.24
3.52
4.85
0.00
1.00
2.00
3.00
4.00
5.00
6.00
1980 1981 1982 1983
Z Score
In 1980 and 1981, the Z score of the
Saskoil was 2.18 & 2.24 respectively which
was in the “Gray” zone. But in the 1982&
1983, the Z score is higher than 2.99 which
is in “Safe” zone
bankruptcy risk of
the company is
low
14. Problem Statement:
The main issue is that Govt. wants to privatize the Saskoil and issue IPO
and underwriters have to find out the best possible way to issue.
First of all decisions must be made regarding whether to do a primary or
secondary share offering? If primary offering is to be done then alternatives are:
•Issue 100% common stock.
•Issue 100% Treasury bond.
•Blended issue of units of preferred share and common share or units of
convertible debentures and common shares.
If alternative 3 is taken under consideration then identify:
•How many convertible securities and how many shares would constitute a
unit?
•What would be the price of a unit?
Finally if secondary share offering is done then what portion of ownership the
govt. delivers to the public.
15. Assumptions:
Sales growth from 2013 was 12%.
Royalties 45% of Sales.
Selling, general and administrative 12.32% of
sales.
Depreciation and amortization 8%
Property Plant and Equipment growth rate 8%.
Perpetual growth rate is 2.5%
Tax rate is 35%.
16. WACC-Calculation:
Beta 1.14
Excess return on the market 6.40%
Cost of equity 17.46%
Cost of debt 11%
After tax cost of debt 7.15%
Total equity 141,106
Long term debt 25,000
Debt/Equity 0.18
Weight of equity 84.95%
Weight of debt 15.05%
WACC 15.90%
Risk premium 2%
Rate taken for forcasting ( WACC) 17.90%
17. Valuation Of Base Case
Enterprise value 233,690
Cash 16,580
(-) Book value of debt 25,000
Firm equity value 225,270
No of shares outstanding 19611
Per share price 11.49
Terminal growth rate 2.50%
WACC 19.41%
18. Simulation Of Base Case
Forecast: Enterprise value
Statistic Forecast values
Trials 10,000
Base Case 266,844
Mean 216,190
Median 214,028
Mode '---
Standard Deviation 52,119
Variance 2,716,364,885
Skewness 0.2064
Kurtosis 3.14
Coeff. of Variation 0.2411
Minimum 37,862
Maximum 454,115
Mean Std. Error 521
19. Simulation of base case
Enterprise
value of
Quintiles is
most
sensitive to
royalties and
sensitivity
ratio is -77%
Most
sensitive
input
20. Simulation of base case
Forecast: Per share price
Statistic Forecast values
Trials 10,000
Base Case 18.31
Mean 14.72
Median 14.57
Mode '---
Standard Deviation 3.69
Variance 13.64
Skewness 0.2064
Kurtosis 3.14
Coeff. of Variation 0.2508
Minimum 2.09
Maximum 31.59
Mean Std. Error 0.04
21. Simulation of base case
Share Price
of Quintiles
is most
sensitive to
Royalties
and
sensitivity
ratio is -70%
Most
sensitive
input
22. Simulation Analysis: Alternatives
Here we take 6 different alternatives-
1. Alt-1 100% common stock
2. Alt-2 100% Treasury bond
3. Alt-3 70% common stock + 30% convertible bond
4. Alt-4 40% common stock+ 60% convertible bond
5. Alt-5 40% common stock+ 60% preferred stock
6. Alt-6 80% common stock + 20% preferred stock
23. ALT-1: 100% common stock
Alternative 1
Fund Required 80000
Floatation Cost
10% 8000
Total Fund 88000
No. Of New Share 5500
WACC for alternative 1
Risk free rate 10.16%
Beta 1.22
Excess return on the market 6.40%
Cost of equity 17.97%
Cost of debt 11%
After tax cost of debt 7.15%
Total equity 229,106
Long term debt 25,000
Debt/Equity 0.11
Weight of equity 90.16%
Weight of debt 9.84%
WACC 16.91%
Risk premium 2.50%
Rate taken for forecasting ( WACC) 19.41%
24. ALT-1: 100% common stock
Valuation
Enterprise value 233,690
Cash 16,580
(-) Book value of debt 25,000
Firm equity value 225,270
No of shares outstanding 19611
Per share price 11.49
Terminal growth rate 2.50%
WACC 19.41%
25. ALT-1: 100% common stock
Simulation
Forecast: Enterprise value
Statistic Forecast values
Trials 10,000
Base Case 233,267
Mean 190,886
Median 189,033
Mode '---
Standard Deviation 45,640
Variance 2,083,029,614
Skewness 0.1936
Kurtosis 3.12
Coeff. of Variation 0.2391
Minimum 33,928
Maximum 396,194
Mean Std. Error 456
26. ALT-1: 100% common stock
Simulation
Forecast: Per share price
Statistic Forecast values
Trials 10,000
Base Case 11.47
Mean 9.3
Median 9.21
Mode '---
Standard Deviation 2.33
Variance 5.42
Skewness 0.1936
Kurtosis 3.12
Coeff. of Variation 0.2501
Minimum 1.3
Maximum 19.77
Mean Std. Error 0.02
27. Alt-2 100% Treasury bond
Alternative 2
Fund Required 90000
Floatation Cost
10% 9000
Total Fund 99000
Book Value Of Debt 124000
WACC for alternative 2
Risk free rate 10.16%
Beta 1.79
Excess return on the market 6.40%
Cost of equity 21.62%
Cost of debt 11%
After tax cost of debt 7.15%
Total equity 141,106
Long term debt 124,000
Debt/Equity 0.88
Weight of equity 53.23%
Weight of debt 46.77%
WACC 14.85%
Risk premium 2.5%
Rate taken for forcasting ( WACC) 17.35%
28. Alt-2 100% Treasury bond
Valuation
Enterprise value 281,046
Cash 16,580
(-) Book value of debt 124,000
Firm equity value 173,626
No of shares outstanding 14111
Per share price 12.30
Terminal growth rate 2.50%
WACC 17.35%
29. Alt-2 100% Treasury bond
Simulation
Forecast: Enterprise value
Statistic Forecast values
Trials 10,000
Base Case 278,313
Mean 224,704
Median 222,463
Mode '---
Standard Deviation 53,980
Variance 2,913,836,292
Skewness 0.1985
Kurtosis 3.15
Coeff. of Variation 0.2402
Minimum 38,979
Maximum 475,548
Mean Std. Error 540
30. Alt-2 100% Treasury bond
Simulation
Forecast: Per share price
Statistic
Forecast
values
Trials 10,000
Base Case 12.11
Mean 8.31
Median 8.15
Mode '---
Standard Deviation 3.83
Variance 14.63
Skewness 0.1985
Kurtosis 3.15
Coeff. of Variation 0.4603
Minimum -4.85
Maximum 26.09
Mean Std. Error 0.04
31. Alt-3 70% common stock + 30% convertible bond
Alternative 3
Fund Required 130000
Floatation Cost 10% 13000
Total Fund 143000
Share Price 16
No. Of Share In An Unit 50
Debenture Price 100
No. Of Debenture In A Unit 4
1 Unit(50 CS + 4 Convertible Debenture) 1200
No Of Units To Be Issued 119
% Of Share In Total Fund 66.67%
% Of Con. Debenture In Total Fund 33.33%
No. Of New CS 5958.3
Book Value Of Debt 72667
WACC for alternative 3
Risk free rate 10.16%
Beta 1.37
Excess return on the market 6.40%
Cost of equity 18.91%
Cost of debt 11%
After tax cost of debt 7.15%
Total equity 236,439
Long term debt 72,667
Debt/Equity 0.31
Weight of equity 76.49%
Weight of debt 23.51%
WACC 16.15%
Risk premium 2.5%
Rate taken for forcasting ( WACC) 18.65%
32. Alt-3 70% common stock + 30% convertible bond
Valuation
Enterprise value 249,525
Cash 16,580
(-) Book value of debt 72,667
Firm equity value 193,439
No of shares outstanding 20068.93
Per share price 9.64
no. of units to be issued 119
Per Unit price 1,623
Terminal growth rate 2.50%
WACC 18.65%
33. Alt-3 70% common stock + 30% convertible bond
Simulation
Forecast: Enterprise value
Statistic Forecast values
Trials 10,000
Base Case 248,397
Mean 202,279
Median 200,304
Mode '---
Standard Deviation 48,433
Variance 2,345,743,681
Skewness 0.1947
Kurtosis 3.13
Coeff. of Variation 0.2394
Minimum 35,641
Maximum 422,777
Mean Std. Error 484
34. Alt-3 70% common stock + 30% convertible bond
Simulation
Forecast: Per Unit price
Statistic Forecast values
Trials 10,000
Base Case 1,614
Mean 1,227
Median 1,210
Mode '---
Standard Deviation 406
Variance 165,185
Skewness 0.1947
Kurtosis 3.13
Coeff. of Variation 0.3313
Minimum -172
Maximum 3,077
Mean Std. Error 4
35. Alt-4 40% common stock+ 60% convertible bond
Alternative 4
Fund Required 130000
Floatation Cost 10% 13000
Total Fund 143000
Share Price 16
No. Of Share In An Unit 25
Debenture Price 100
No. Of Debenture In A Unit 7
1 Unit(25 CS + 7 Convertible Debenture) 1100
No Of Units To Be Issued 130
% Of Share In Total Fund 36.36%
% Of Con. Debenture In Total Fund 63.64%
No. Of New CS 3250
Book Value Of Debt 116000
WACC for alternative 4
Risk free rate 10.16%
Beta 1.59
Excess return on the market 6.40%
Cost of equity 20.30%
Cost of debt 11%
After tax cost of debt 7.15%
Total equity 193,106
Long term debt 116,000
Debt/Equity 0.60
Weight of equity 62.47%
Weight of debt 37.53%
WACC 15.37%
Risk premium 2.5%
Rate taken for forcasting ( WACC) 17.87%
36. Alt-4 40% common stock+ 60% convertible bond
Valuation
Enterprise value 267,754
Cash 16,580
(-) Book value of debt 116,000
Firm equity value 168,334
No of shares outstanding 17361
Per share price 9.70
no. of units to be issued 130
Per Unit price 1,295
Terminal growth rate 2.50%
WACC 17.87%
37. Alt-4 40% common stock+ 60% convertible bond
Simulation
Forecast: Enterprise value
Statistic Forecast values
Trials 10,000
Base Case 265,729
Mean 215,286
Median 213,082
Mode '---
Standard Deviation 51,642
Variance 2,666,864,153
Skewness 0.1966
Kurtosis 3.14
Coeff. of Variation 0.2399
Minimum 37,583
Maximum 453,317
Mean Std. Error 516
38. Alt-4 40% common stock+ 60% convertible bond
Simulation
Forecast: Per Unit price
Statistic Forecast values
Trials 10,000
Base Case 1,279
Mean 891
Median 874
Mode '---
Standard Deviation 397
Variance 157,803
Skewness 0.1966
Kurtosis 3.14
Coeff. of Variation 0.4457
Minimum -476
Maximum 2,722
Mean Std. Error 4
39. Alt-5 40% common stock+ 60% preferred stock
Alternative 5
Fund Required 130000
Floatation Cost 10% 13000
Total Fund 143000
Common Stock Price 16
No. Of Share In An Unit 25
Preferred Stock Price 18
No. Of Share In A Unit 50
1 Unit(25 CS + 50 PS) 1300
No Of Units To Be Issued 110
% Of CS In Total Fund 30.77%
% Of PS In Total Fund 69.23%
No. Of New CS 2750
No. Of New PS 5500
No. Of New Share 8250
WACC for alternative 5
Cost of equity 10.18%
Cost of debt 11%
After tax cost of debt 7.15%
Total equity 284,106
Long term debt 25,000
Debt/Equity 0.09
Weight of equity 91.91%
Weight of debt 8.09%
WACC 9.94%
Risk premium 4.00%
Rate taken for forcasting ( WACC) 13.94%
40. Alt-5 40% common stock+ 60% preferred stock
Valuation
Enterprise value 321,886
Cash 16,580
(-) Book value of debt 25,000
Firm equity value 313,466
No of shares outstanding 22361
Per share price 14.02
no. of units to be issued 110
Per Unit price 2,850
Terminal growth rate 2.50%
WACC 16.00%
41. Alt-5 40% common stock+ 60% preferred stock
Simulation
Forecast: Enterprise value
Statistic
Forecast
values
Trials 10,000
Base Case 530,814
Mean 411,177
Median 405,863
Mode '---
Standard Deviation 103,998
Variance
10,815,582,7
56
Skewness 0.2833
Kurtosis 3.22
Coeff. of Variation 0.2529
Minimum 68,097
Maximum 907,800
Mean Std. Error 1,040
42. Alt-5 40% common stock+ 60% preferred stock
Simulation
Forecast: Per Unit price
Statistic Forecast values
Trials 10,000
Base Case 4,749
Mean 3,661
Median 3,613
Mode '---
Standard Deviation 945
Variance 893,850
Skewness 0.2833
Kurtosis 3.22
Coeff. of Variation 0.2582
Minimum 543
Maximum 8,176
Mean Std. Error 9
43. Alt-6 80% common stock + 20% preferred stock
Alternative 6
Fund Required 130000
Floatation Cost 10% 13000
Total Fund 143000
Common Stock Price 16
No. Of Share In An Unit 60
Preferred Stock Price 18
No. Of Share In A Unit 20
1 Unit(60 CS + 20 PS) 1320
No Of Units To Be Issued 108
% Of CS In Total Fund 72.73%
% Of PS In Total Fund 27.27%
No. Of New CS 6500
No. Of New PS 2167
No. Of New Share 8667
WACC for alternative 6
Cost of equity 6.21%
Cost of debt 11%
After tax cost of debt 7.15%
Total equity 284,106
Long term debt 25,000
Debt/Equity 0.09
Weight of equity 91.91%
Weight of debt 8.09%
WACC 6.28%
Risk premium 4.00%
Rate taken for forcasting ( WACC) 10.28%
44. Alt-6 80% common stock + 20% preferred stock
Valuation
Enterprise value 358,873
Cash 16,580
(-) Book value of debt 25,000
Firm equity value 350,453
No of shares outstanding 22777.67
Per share price 15.39
no. of units to be issued 108
Per Unit price 3,235
Terminal growth rate 2.50%
WACC 15.00%
45. Alt-6 80% common stock + 20% preferred stock
Simulation
Forecast: Enterprise value
Statistic Forecast values
Trials 10,000
Base Case 266,844
Mean 216,190
Median 214,028
Mode '---
Standard Deviation 52,119
Variance 2,716,364,885
Skewness 0.2064
Kurtosis 3.14
Coeff. of Variation 0.2411
Minimum 37,862
Maximum 454,115
Mean Std. Error 521
46. Alt-6 80% common stock + 20% preferred stock
Simulation
Forecast: Enterprise value
Statistic Forecast values
Trials 10,000
Base Case 248,397
Mean 202,279
Median 200,304
Mode '---
Standard Deviation 48,433
Variance 2,345,743,681
Skewness 0.1947
Kurtosis 3.13
Coeff. of Variation 0.2394
Minimum 35,641
Maximum 422,777
Mean Std. Error 484
47. Comparison among alternatives
Particulars
Enterprise
value
Per share
price
Unit price WACC CV
100% common stock 233690
11.49
19.41% 0.2508
100% Treasury bond 281046
12.30
17.35% 0.2501
70% common stock + 30% convertible bond 249525
9.64 1,623
18.65% 0.3313
40% common stock+ 60% convertible bond 267754
9.70 1,295
17.87% 0.4457
40% common stock+ 60% preferred stock 321886
14.02 2,850
16.00% 0.2582
80% common stock + 20% preferred stock 358873 15.39 3,235
15.00% 0.2508
49. RECOMMENDATION
Alternative 6
80% common stock + 20% preferred
stock
Fund Required 130000
Floatation Cost 10% 13000
Total Fund 143000
Common Stock Price 16
No. Of Share In An Unit 60
Preferred Stock Price 18
No. Of Share In A Unit 20
1 Unit(60 CS + 20 PS) 1320
No Of Units To Be Issued 108
% Of CS In Total Fund 72.73%
% Of PS In Total Fund 27.27%
No. Of New CS 6500
No. Of New PS 2167
No. Of New Share 8667
Offer price
Common Stock 16
Preferred Stock 18
1 UNIT(Blend of instruments) 1000
Wood Gundy as the lead manager of this
privatization should select Alternative 6
which is combination of 80% common
stock + 20% preferred stock issue for
privatization of Saskoil.
