Essay on Interco Case

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Pages: 6

Interco Case Study

Interco’s financial performance was moderately successful for the 1988 fiscal year. Interco’s current ratio (3.6 to 1) and debt-to-capitalization rate (19.3%) indicate that the company is financially flexible. Furthermore, both overall sales and net income increased from the previous year (1987) due largely to the strong performance of Interco’s furniture and footwear divisions. Sales in 1988 increased by 14.7% in the furniture division and 34.2% in the footwear division. Despite the promising nature of these two divisions, Interco still had to contend with the nagging issue of the underperforming apparel and general retail groups. Due to a number of factors including declining consumer spending and aggressive
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Also, sales growth in the Apparel division was predicted to increase by 7.1% but it had experience negative net operating earnings in the previous year; the assumption of growth does not seem to be supported by the date in the income statement.
The Interco board was offered $70 per share from City Capital. We would advise against accepting this offer because their shares were valued at anywhere from $68 to $80 per share. Interco knows that their stock is currently undervalued because the apparel portion of their company isn’t doing very well. Once they are able to sell off the apparel portion of their company their stock value will rise and will offer more value to their shareholders. City Capital knows that the current stock is undervalued, which is why they want to buy Interco in the first place. City Capital plans on selling off the apparel portion of the company once they acquire Interco. City Capital also stated that they would be willing to offer more money per share for the stock, which is evidence that they believe the stock is truly undervalued due to the apparel. According to Figure 1, the data is very similar to Exhibit 12: Discounted Cash Flow Analysis. The stock prices between the two were mostly the same, however there were two deviations of plus $1 and one deviation of -$1. Because the data from the two were similar, this gives us further evidence that the stock price is undervalued. Interco should either ask for a much higher price