FI499 Unit 10 Capstone Recommendation Paper Example

Buy Paddlemark, and Here Is What Would Change My Mind: A Unit 10 Capstone Recommendation Traced to the Term's Assumptions

[Student Name]

Purdue University Global

FI499: Bachelor's Capstone in Finance

Unit 10 Capstone Recommendation

[Instructor Name]

[Date]

Tidewell, Paddlemark and every figure are composite; the books and article cited are real.

Executive Summary

Tidewell should buy Paddlemark for $21.0 million, with signed ten-year extensions of Paddlemark's two expiring building leases as a condition of closing, a $1.5 million enrollment holdback, a rate cap on the floating term loan, and a scheduling test on two Paddlemark schools before signing. Paddlemark is worth $22.54 million to Tidewell, $19.75 million on its own plus $2.79 million of savings. The price is justified only if Tidewell can raise Paddlemark's margin from 25 to 27 percent and deliver $350,000 of annual savings. The recommendation would change to no if either lease is refused, if the price rises above $22.54 million, if the two-school scheduling trial shows the margin cannot rise, or if the return Tidewell's owners demand climbs past about 11.05 percent.

The Decision and the Criterion

The Unit 2 proposal framed one decision: buy Paddlemark for $21.0 million, build two schools of its own at an estimated $11.0 million, or make neither move. It set one criterion: value to Tidewell's owners against cost, measured by discounted cash flow. Discounted cash flow is the method most practitioners report using for capital decisions of this kind (Graham & Harvey, 2001), and it allows the three alternatives, which differ in size, to be compared in dollars of value created.

The Evidence, in the Order the Term Built It

Assumptions (Unit 3). Twelve inputs, A1 to A12, each with a source and confidence grade. Three were marked critical: first-year revenue (A1), Paddlemark's margin (A4) and savings (A5).

Statements (Unit 4). Paddlemark's revenue grew about 5.6 percent a year for three years while EBITDA stayed near $2.10 million, as labor rose from 31 to 34 percent of revenue. The margin slid three points over those years. Upkeep spending of $540,000 over three years against $1.86 million of depreciation confirmed the $900,000 conversion budget (A7). The share of revenue from monthly tuition plans rose from 44 to 52 percent. Tidewell's debt of $12.0 million, 1.63 times EBITDA, leaves room for the acquisition loan.

Valuation (Unit 5). Free cash flows of $0.51 million rising to $2.11 million over five years are worth $6.09 million at 10.5 percent; the terminal value adds $16.45 million, for a total of $22.54 million. Without savings, value is $19.75 million.

Risks (Unit 7). Losing the two leased schools would cut value to $17.64 million. Savings below about $157,000 a year would put value under the price. A first-year revenue fall of 8.8 percent would do the same. In a recession that took 12 percent off the combined EBITDA, debt would reach about 3.12 times that figure, still inside the covenant. A two-point rate rise would add $280,000 of interest.

Sensitivity (Unit 8). The margin has only 2.1 points of room, on an input whose recent direction has been down. The discount rate has 0.55 points of room, terminal growth 0.76 points, first-year revenue 6.8 points and savings 55 percent of the estimate. A combined case with no savings and a 6 percent first-year fall gives $18.85 million.

The Change Log

Figures in this paper are unchanged from earlier units except where the log records a revision. Three entries matter.

A4, flagged in Unit 4. The margin assumption stayed at 27 percent, but its support was downgraded from estimate to argument after the statements showed three years of decline. This paper responds by making a scheduling test a condition before signing.

A7, confirmed in Unit 4. The conversion budget was raised to high confidence.

Model correction, Unit 6. A peer review found that an early draft used 3.0 percent terminal growth instead of A3's 2.5 percent and omitted A7's conversion budget. Both were corrected; the value of $22.54 million reflects the corrected model. No assumption changed; the model was brought back into line with the list.

Every figure in this recommendation traces to an assumption set in Unit 3 or a correction logged since, and the recommendation is to buy because the value exceeds the price only after counting improvements Tidewell itself must deliver, which is why the conditions matter as much as the number.

Why Not Build

Two new schools would cost about $11.0 million. New swim schools take about three years to reach $1.2 million of revenue each, below Paddlemark's average, and carry losses in their first year. Discounted at 10.5 percent, their cash flows fall about $4.17 million short of the building cost. Building would also leave Paddlemark available to a competitor in the same suburbs.

Why Not Wait

Waiting preserves Tidewell's cash and avoids the risks in Unit 7, but Paddlemark's founder is retiring and the business will be sold. A competitor buying it would gain six schools in Tidewell's market. Doing nothing has a value of zero in the model, but in practice it carries a competitive cost the model does not count.

The Recommendation

Acquire Paddlemark for $21.0 million on four terms.

First, lease extensions. Signed ten-year extensions of both expiring building leases, at stated rents, before closing. This removes the largest single risk.

Second, an enrollment holdback. Tidewell keeps back $1.5 million at closing and pays it to the seller over the following year, scaled to how many enrolled children remain compared with the count both sides sign at closing. This protects against families leaving during the rebrand.

Third, a rate cap. Interest on $10 million or more of the floating loan capped for its first three years.

Fourth, a scheduling test. Before the offer is signed, apply Tidewell's lesson scheduling to a sample of Paddlemark's current classes and confirm that fuller classes would cut instructor cost per child enough to support a 27 percent margin.

Research on acquisitions shows that buyers who count on savings often pay most of them away and then fail to deliver them on time (Sirower, 1997). These terms protect Tidewell where that risk is greatest: the margin, the savings and enrollment.

What Would Reverse This Recommendation

The recommendation would change to no under any one of four conditions. First, either landlord refuses to extend, which would cut value below the price. Second, the seller raises the price above $22.54 million, the full value to Tidewell. Third, the trial at two schools finds no path to a margin above 25 percent, at which point value and price are roughly equal and Tidewell gains nothing for its risk. Fourth, Tidewell's required return rises above about 11.05 percent, for instance because higher rates lift its cost of capital. Corporate finance texts emphasize that a recommendation is more useful when it says what evidence would overturn it, since that tells the decision maker what to watch (Brealey et al., 2020).

Conclusion

The term began with a hinge: whether Paddlemark's families stay after the name changes. The evidence showed a second hinge that matters more, whether Tidewell can lift Paddlemark's margin. The recommendation is to buy, because value exceeds price, but with terms and a test aimed at both hinges (Koller et al., 2020).

References

Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of corporate finance (13th ed.). McGraw-Hill Education.

Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2-3), 187-243. https://doi.org/10.1016/S0304-405X(01)00044-7

Koller, T., Goedhart, M., & Wessels, D. (2020). Valuation: Measuring and managing the value of companies (7th ed.). Wiley.

Sirower, M. L. (1997). The synergy trap: How companies lose the acquisition game. Free Press.