CFA Institute Research ChallengeHosted in

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School Name – Student ResearchSector: Process Industries & Industrial Specialties

Axalta Coating Systems Ltd.

Date: 01/20/2017 Headquarters: Philadelphia, PA Recommendations: SellTicker: NYSE: AXTA Current Price: $28.75 (01/20/2017) Target Price: $18.38

Table 1: Market Data52 Week Range $20.67- $30.45Avg. Daily Vol. 2,210,110Shares Outstanding (m) 240.5Market Value ($m) $6,021P/E (LTM) 56.9xEnterprise Value ($m) $9,093EV/EBITDA 10.72x

Table 2: Financial Data2013 2014 2015

Revenue Growth 1.35% 1.79% -6.33%

Gross Margin 28.49% 32.12% 34.89%

EBITDA Margin 8.91% 18.53% 21.22%

EPS -$1.55 $0.59 $0.74

ROE -16.52% 2.52% 8.85%

ROA -4.75% 0.42% 1.55%

Interest Coverage (TIE) 1.52x 3.92x 4.61x

Total Debt/EBITDA 10.21x 4.54x 3.94x

Table 3: Valuation SummaryWeight^ Estimates

FCFF DCF* 60% $ 13.62

Relative Multiples 40%

Enterprise Value/EBIT $ 24.37

Enterprise Value/EBITDA $ 43.61

Enterprise Value/Sales $ 30.83

Price/Sales $ 25.17

Price/Earnings $ 8.30

Price/Book Value $ 22.38

Price/Cash Flow $ 24.36

Price/Free Cash Flow   $ 25.18

Target Price Estimate $ 18.38 *A scenario analysis using combinations of different years to terminal value and growth rate in the FCFF model projected a target price ranging from $13.43 to $13.79.^A sensitivity analysis on the weights produces similar estimated target price for AXTA.

Executive Summary

Headquartered in Philadelphia, PA, AXTA is a leading global supplier of paint for a range of vehicles. AXTA manufactures, markets, and distributes liquid and powder coatings for cars, trucks, OEMs, body shops and, other customers.

Investment RecommendationsWe issue a Sell recommendation with a target price of $18.38. The investment decision combines a Free Cash Flow to the Firm Model with Relative Multiples based valuations using a weighted average. The sell recommendation is driven by our:

Investment Thesis and OutlineSupported by our quantitative financial model and qualitative analysis of AXTA’s business operations, a Sell recommendation on AXTA is warranted as it is believed to have a long-term growth of 2.49% y-o-y in five years. Determining factors include: Stable Industry Outlook, based on an analysis of the underlying industries and

countries’ economies in which AXTA operates. Competitive Positioning of AXTA as a leading company in their market

segment, determined through an overall company analysis. Investment Risks such as projected economic, market, currency, credit, and

business & operational risks. The Monte Carlo Simulation using estimated mean growth rate, suggests a

mean intrinsic value of $13.62 with a range from $8.80 to $18.70.

Latest News Updates and Implications

Acquisition of Peinture Antico Diffusion SAS – 12/2016: AXTA agreed to terms with P.A.D., acquiring the France-based company for an undisclosed amount. P.A.D. is expected to expand market share in EMEA.

Continued Expansion in China – 11/2016: AXTA continued their investments into China by planning a new manufacturing facility in Nanjing, bringing their total investments in China up to $100 million since 2013. The project is subject to approval by AXTA’s board of directors and Chinese officials.

Third Quarter Results and Updates – 10/2016: AXTA released their third quarter results, showing 4.4% constant currency y-o-y same quarter net sales increase. Third quarter operating cash flows were down by 9%, due to a large cash expenditure for M&A purposes. Yearly earnings call is scheduled on February 15, 2017. AXTA is expecting 0-2% growth in 2017.

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Figure 1: Historical Share Prices

AXTA S&P 500

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Figure 3: Company History

Top 15 Holders; 49.01%

Insider Ownership; 0.66%

Other Institutional Holders; 50.33%

Figure 4: Ownership Statistics

Performance Coatings, 58%

Transportation Coatings; 42%

Figure 5: 2015 Sales Breakdown

Table 4: 2015 Industry Competitors

Companies DOL DF

L

Market Cap ($B)

Net Debt/ EBITDA

Axalta -1.88x 1.5x $ 6.52 3.38x

PPG Industries

-166.3

x

1.07x

$26.21

1.17x

Sherwin-Williams

13.31x

1.04x

$25.17

0.96x

RPM Inc. -3.42x 1.2x $

7.29 2.13x

Valspar -1.5x 1.15x

$ 8.14 2.61x

Business Description

Originally founded in 1866, AXTA was formed in 2013 when DuPont carved out the paint division to the Carlyle Group. In 2014, AXTA went public while the Carlyle Group remained the major shareholder until August 2016. Headquartered in Philadelphia, PA, AXTA is a global company with primary business segments in:

Transportation Coatings: AXTA provides advanced coating technologies to original equipment manufacturers (OEM) of light and commercial vehicles.

Performance Coatings: AXTA provides liquid and powder coating solutions to a fragmented and local non-OEM customer base, mainly auto and body shops.

Shareholder BaseListed on the NYSE, AXTA has a single class share structure. Institutions hold 49.01% of shares with Berkshire Hathaway being the largest shareholder at 9.75% (A4, A5) which were acquired directly from the Carlyle Group. Insiders holds 0.66% of shares outstanding. On August 2, 2016 Carlyle ceased to have majority voting rights on AXTA. Currently institutional owners play key roles in the growth and stability of the company. Also, executive compensations are tied to their stock performance.

Management & GovernanceAXTA’s 19 top executives’ management team (A3) brings both domestic and international experience in the petrochemical and performance materials industries to add value to AXTA’s shareholders. Charles Shaver, CEO, with 35 years of experience in the specialty chemicals industry was brought in by the Carlyle Group. Top executives’ commitment has generated shareholder value by the following strategic actions:

Transitioned AXTA from a private equity controlled carve out unit into a publicly traded company with broader ownership.

Improved financial standing through refinancing and repayment of debt. This strengthened AXTA’s financial position and led AXTA to potentially become a dividend paying company in the future.

Developed multiple systems related to reporting, cash management, and R&D, which is to improve operation efficiencies, enhance customer experiences, and reduce cost.

Dedicated efforts in growing AXTA’s operations in established and emerging markets. AXTA is focusing its growth in Asia-Pacific, especially China, and expects their new manufacturing plant in Nanjing to be fully operational by the end of 2020.

Attained EPS CAGR of 32.1% from 2014-2016. Additionally, CEO Shaver anticipates an increase in sales of 50% to $6 billion in the next 3-5 years through continued market expansion via M&A, which is typical for this industry.

The Management and Governance Standards of AXTA is Given a Low Risk Metric per “The Four Pillars of Quality Score” established by the Institutional Shareholder Services Inc. (A2):

Committees on the Board: Established executive, audit, compensation and, nominating & corporate governance committees (A1).

Audit and Risk Oversight: Complied with the Public Company Accounting Oversight Board by designating an audit committee and being audited by an external source.

Executive Compensation: Justified the compensation committee oversight and compensation programs requirements.

Carlyle Group’s exit in August 2016 provides higher independence to the Board of Directors and a broader shared governance by shareholders.

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12%

9%

4%

3%

3%

69%

Figure 6: Industry Market Share

PPG Industries Sherwin-Williams RPM Inc. Valspar Axalta Other

10%

39%

29%

12%

11%

Figure 7: Competition Sales Comparison

Axalta PPG Industries Sherwin-Williams RPM Inc. Valspar

AXTA Valspar Sherwin-Williams PPG Industries RPM Inc. $-

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

1 2 3 4 51 2 3 4 5

$6,776 $8,538

$26,488 $25,428

$7,019

Figure 8: Competition Market Values Comparison ($M)

Refinsih42%

Industrial16%

Light Vehicle32%

Commercial Vehicle10%

Figure 9: Breakdown of AXTA's Products

Industry Overview and Demand Drivers

Industry OverviewThe global paint and coating industry generated $128.23 billion in revenue in 2015, which came mainly from the U.S. (53.4%), China (6.9%), and Germany (4.0%). As shown in Figure 10, total industry market share measured by revenue indicates that the top five industry leaders make up approximately one-third of the unsaturated market, which suggests potential growth opportunities for companies in this industry(F1).

Steady growth in the automotive industry provides all companies, including AXTA, an opportunity to expand their refinishing business globally and generate higher sales. On the other hand, AXTA’s top competitors have managed to diversify revenues outside of refinishing industries, such as aviation/marine vehicles, polymer floors, and weatherproofing to target the needs of diverse niches, which could be a potential threat to AXTA’s effort in gaining market dominance.

The 2015 economic growth in the Asia-Pacific region, particularly China with its GDP increases of 7.9%, along with its three year projected growth in the coating industry, allowed a revenue increase of 18.3%. In addition, the growth in the industrial and commercial vehicles industry, plus the growing population in China presents opportunity for AXTA to grow in the industrial architecture and refinishing markets for light and commercial vehicles. However, a forecasted 6.5% 2017 GDP growth in China projects a declining increase in revenue (G1).

Overall, the industry’s Degree of Operating Leverage (DOL) is -32x (Figure 9); most industry leaders have negative DOLs, which is consistent with the disproportionate cost reduction paired with declining sales. In addition, Degree of Financial Leverage (DFL) of the industry is 1.2x on average ranging from 1.04 to 1.50 for AXTA, which suggests AXTA’s EPS is more sensitive to changes in EBIT (I1).

Demand DriversDemand drivers for each of AXTA’s four main product lines include industrial production, the production of light vehicles worldwide, global commercial vehicle production, and vehicle collisions (Figure 9) which all are fundamentally tied to economic growth and population growth of a specific age group.

Industrial Performance Coating is Tied to Industrial Production: Industrial production indicators, such as trucking, has seen U.S growth around 2% for the past five years, and are expected to continue to grow at a similar rate. However, industrial productions are affected by the general macroeconomic conditions of a country, and subsequently are subject to more market risks than any other driver.

Light Vehicle Transportation Coating is Tied to Production of Light Vehicles Worldwide: The production of light vehicles worldwide has grown 3.3% annually since 2012 and is projected to continue to grow at a rate of 3.9% y-o-y until 2020, which is a positive sign for AXTA’s light vehicle coatings demand. The U.S. is the largest market in the world in automobile sales, with an uptick in car sales correlating directly with AXTA’s sales to OEMs. Furthermore, in Europe, y-o-y car sales in 2015 were up approximately 9.5%; the upward trend is projected to continue in the future. The automobile industry is projected to grow 3% y-o-y in the Middle East and Africa. Although in Latin America and China, there has been a 30% slowdown in sales since 2012, car sales declined merely 2.7% in 2015. In addition, China has the largest sales in new cars in 2015 (D1).

Commercial Vehicle Transportation Coating is Tied to Global Commercial Vehicle Production: Commercial vehicle production has grown worldwide at an average of 1.7% annually for the past 15 years which is inline mostly with

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long term average global GDP growth. The historical growth trend of commercial vehicle production indicates that demand for AXTA’s commercial vehicle coating will remain stable with the macroeconomic growth in countries AXTA operates.

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North America34%

Latin America13%

EMEA35%

Asia Pacific18%

Figure 10: Sales from Global Markets

North America Latin America EMEA Asia Pacific

2013 2014 2015 2016 2017 20181800000

1850000

1900000

1950000

2000000

2050000

2100000

2150000

0

1

2

3

4

5

6

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8

9

Figure 11: World Motor Vehicles Sales Outlook

Sales (M) Growth y-o-y (%)

Year

Sales (

M)

Growth

(%)

2013 2014 2015 2016 2017 2018 $-

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

Figure 12: Sales Outlook

North America APAC Europe

Year

Sales

(M)

2013 2014 2015 2016 2017 2018

-2.00%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

Figure 13: Sales Outlook y-o-y % Growth

APAC North America Europe

Year

YoY %

Grow

th

Refinish Performance is Tied to Vehicle Collisions: Car accidents have increased at a rate of 1-2% a year for the last several years, which correlates with an increase in traffic accidents (bumper-to-bumper). In 2013, costs related to car accidents totaled $518 billion dollars for countries and car owners combined. Specifically, in the U.S., car accidents cost $230.6 billion per year. The European market is also expected to see a surge in collision costs, due to their aging car fleet. The projected increase in collision will strengthen and continue to bring in a dependable stream of revenue from AXTA’s refinish products market (D1, H1).

RegulationsDue to an increase in regulations, coating companies have eliminated some components in their existing products. Between 1980-1990s discussions regarding the Volatile Organic Compounds (VOC) emission, led to a decrease in VOC. AXTA has developed an environmentally friendly waterborne coating solution that is used in both the U.S. and Canada. AXTA’s strategic move helps the company to tap further into Canadian market which requires the use of waterborne solutions for coating application systems. While AXTA positions itself for regulation changes, the company is able to maintain a solid bottom line.

Economic Growth – AXTA’s Future Growth Opportunities (Figure 14) EMEA Regional GDP Growth - GDP in the European Union has fluctuated

within the past 6 years, showing just 1.19% average growth compared to a 1.87% projected GDP growth until 2020. GDP growth for North Africa and the Middle East has been 2.49% since 2013 and is projected to be 3.33% until 2018. AXTA’s future geographic sales growth is expected to follow the positive trend of GDP growth in the EMEA region.

North America GDP Growth - The North American economy has grown at an average of 3.33% for the past 5 years, and is expected to grow at an average of 3.90% until 2020. AXTA’s future sales are believed to follow the positive trend of GDP growth in North America.

Asia-Pacific GDP Growth - Since 2013, the Asia-Pacific market has had GDP growth of 6.7%, and is projected to have a 6.1% GDP growth rate until 2018. Despite this deceleration, the growth in the Asia-Pacific market is sufficient and will help AXTA grow its AP regional sales.

Latin America GDP Growth - Latin America has a 5-year average of -0.16% GDP growth largely driven by two negative years of growth in 2014 and 2015. GDP is expected to grow 1.3% until 2020, which includes a -13% projected decline for 2017. Due to its high growth volatility, Latin America is a potential threat for AXTA as it could hurt their future sales and slow down the overall growth of AXTA (E1).

Competitive Positioning

Size and Industry Position - With a market value of $6.16 billion, AXTA is the fifth largest player in the coating industry. In addition, AXTA is a leader in their segments, earning 90% of their 2015 revenue from refinish and light vehicle coating markets where they have either the #1 or #2 global market share (D1). In 2015, AXTA generated net sales of $4.1 billion while catering to consumers’ needs in both developed and emerging markets.

Products and Customer Service - On the refinishing product line, AXTA has developed a unique production method that they can provide to local shop specialists. The company also assists the local shops by providing the necessary training and equipment to apply AXTA’s products. Additionally, on the transportation coating product line, AXTA strategically positions themselves in the OEM industry by having their trained specialists work in the daily operations at OEM factories.

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2013 2014 2015 2016 2017 2018 $-

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

$700,000

$800,000

-8.00%

-6.00%

-4.00%

-2.00%

0.00%

2.00%

4.00%

6.00%

Figure 14: World Trucks/Construction/Farm Machinery Sales Outlook

Sales (M) Growth (YoY%)

Year

Sales

($M)

Grow

th (%

)

Figure 15: Europe Automotive Collision Repair MarketSize by Product (USD Billion), 2012 – 2022

Source: Global Market Insights

2013 2014 2015 2016 2017 2018

-20.0%

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

Figure 16: World Region's GDP Growth Rates

North America Latin America European Union East Asia/ Pacific

Middle East/ North Africa

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 20150

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

Figure 17: BRIC Vehicle Sales 2005-2015

Russia India Brazil China Total

Sales Growth from Emerging Economies - AXTA has been expanding in emerging economies to increase future sales. Since 2005, vehicle sales in the BRIC countries have grown at an 11.56% CAGR. Part of AXTA’s future sales growth is tied to growth in these countries. Automotive sales are highly correlated with increases in GDP; the BRIC countries GDP is expected to grow an average of 5.05% per year until 2020, boding well for AXTA’s growth in these markets.

Maintain Margins via Variable Cost Structure and Cost Consolidations: AXTA has taken steps towards increasing their productivity with the

implementation of their new “Axalta Way” structural cost reduction initiative. The company has also implemented a more effective IT system and created a global procurement system to consolidate their procurement costs. These endeavors will lead to increasing AXTA’s productivity and reduction of costs.

By lowering both their fixed and variable costs, AXTA is able to maintain and/or raise their gross margin even though their sales may decline, a 5-year trend that can be seen on Figure 18.

While AXTA’s margins have grown, sales have remained stable. As a result, AXTA has been showing growth in profitability margins without actual sales growth, which has been beneficial to AXTA in the short run. However, to increase their future cash flows and stay competitive, AXTA will have to focus on increasing actual sales instead of margins which can be improved simply by slashing costs (J1).

Other competitive advantages of AXTA include: A globally recognized company that has been able to maintain their operations

for the last 150 years. A range of facilities across the world to support the future success of the

company, consisting of 35 manufacturing facilities, 45 customer training centers, and 7 technology centers, which indicates ease of distribution.

12,800 employees located in over 130 countries, illustrating AXTA’s strong global position, adding to the strength of their market presence and the size of the company.

Investment Summary

We issue a Sell recommendation on AXTA with a target price of $18.38 using a Discounted Free Cash Flow to the Firm Model and a Relative Multiples Valuation method. The valuation is supported by factoring in multiple valuation metrics, assumptions, and parameters.

Investment Drivers

Improving Financial Position and Potential DividendsAs a result of the carve out in 2013, AXTA remains heavily leveraged with total debt of $3,356 million. With AXTA’s goal of 2.5-3.0x in leverage, AXTA has been restructuring their debt, resulting in a current net leverage of 3.3x which is still twice the industry’s average level. AXTA does not currently pay dividends to its shareholders due to management’s M&A growth strategy, but the company has stated that they could start as early as Q2 2017 when they hit their leverage target.

Positive Outlook in Related IndustriesThere is a three-year positive outlook for motor vehicles sold worldwide (Figure 12, 13). A positive outlook is directly correlated to AXTA’s growth, as OEMs will require more of AXTA’s coating products for their own purposes. Likewise, AXTA will be able to take advantage of the positive sales outlook for industrial trucks and commercial machinery (Figure 14), further strengthening their position in the global market.

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Dec '11 Dec '12 Dec '13 Dec '14 Dec '15 $-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

Figure 18: COGS and Sales for 2011-2015 ($M)

Sales COGS excluding D&A

Figure 19: Revenue Exposure by CountrySource: FactSet

Highly Variable Cost StructureAXTA has developed a highly variable cost structure that requires low capital intensity through small batch production. As a direct result of this variable cost structure, AXTA was able to avoid major losses due to current turmoil in Latin America. Instead, AXTA lowered their costs and prices to maintain or improve their margins. The result of this strategy was an increase in operating margin up to 8.81% (Table 11).

Customizability of ProductsPossessing over 800 patents and being able to produce 4+ million color variations, AXTA is able to cater to costumers’ needs. This is in part due to their variable cost structure, producing only small-batches and thereby keeping inventories low.

Growing Demand for Waterborne SolutionsAXTA is a leader in waterborne solutions in Latin America. As more environmental regulations are written into law across the world, the demand for AXTA’s waterborne coating solution increases.

Potential Future GrowthAXTA competes in a highly competitive market where switching costs between companies are low but customer loyalty is high, resulting in a high number of repeat customers. Additionally, AXTA has sought growth through M&A previously, but with the company indicating a first dividend payout in Q2 2017, their growth strategy may change. A dividend may help AXTA’s stock price, however, it may not be beneficial to the future growth of the company due to a large amount of debt that may need repayments.

Valuation

The intrinsic value of AXTA is calculated as a weighted average of values estimated using several equity valuation models. The final valuation target relies heavily on a Free Cash Flow to the Firm Discounted Cash Flow (FCFF DCF) model, as it returns the fair value of all future earnings and cash flows. Furthermore, the final valuation combines several relative valuations with the FCFF DCF, to incorporate the market valuation not covered by the DCF model.

5 Year FCFF DCF

Using the FCFF DCF Model, we came up with a final valuation of $13.62. The FCFF DCF Model is based on the most recent annual data from the Company’s 10-K, completed with guidance from the industry outlook, investor outlook, and general company guidance on future actions. The model estimates cash flows generated by the firm after expenses, taxes, and changes in net working capital and investments have been deducted. These cash flows indicate AXTA’s ability to pay out future dividends, repurchase stock, or repay debt (L1-6).

The FCFF DCF Model is most sensitive to the following factors:

Weighted Average Cost of Capital (WACC)The cost of debt and cost of equity were calculated with AXTA’s global operations in mind. Cost of debt was calculated using a weighted average of risk free rates from the regions in which AXTA is present (Table 6). Similarly, cost of equity was calculated using region equity risk premium proportionate to the percentage of sales in each region (Table 8). As a multi-segment company, AXTA’s revenue was split proportionally into their two major segments in order to come up with an accurate unlevered beta (Table 7). These extra steps help to improve the accuracy of the intrinsic value calculation.

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Strengths

Weaknesses

Opportunities

Threats 0

10

20

Figure 20: SWOT Analysis (C1)

Bargaining Power of Buyers

Threat of New Entry

Threat of SubstitutionsBargaining Power of Suppliers

Intensity of Competitive Rivalry

0

5

Figure 21: Porter's Five Forces (B1)

Table 5: Valuation

Weight Average*

DCF Target 60% $ 13.62

Multiples Target Value 40% $ 25.53

Intrinsic Value using Weighted Average $ 18.38 *The average of Multiple based model is the mean of all six

Multiple based model including EV/EBIT, EV/EBITDA,

EV/Sales, Price/Sales, Price/Earnings, Price/BV, Price/CF,

and Price/FCF.

Table 6: Risk Free RateRegion Rate

Americas 2.50%

Europe 1.50%

Asia-Pacific 3.34%

Africa/Middle East 4.36%

Weighted Average 2.49%

Table 7: Unlevered BetaBusiness Weighted

Performance Coating 0.9269

Transportation Coating 0.9727

Company 0.9492

Table 8: Equity Risk Premium

Region Weighted ERP

Asia-Pacific 1.13%

Central/South America 0.43%

Middle East 0.42%

North America 2.13%

Europe 1.77%

ERP 5.89%

Table 9: DCF AssumptionsRisk Free Rate 2.49%

Risk Premium 5.89%

Tax Rate 39.27%

Cost of Debt 4.25%

High Growth Beta 1.51

Terminal Beta 0.90

Reinvestment Rate 100%

Debt Ratio 34.56%

BetaBeta is part of the cost of equity calculation used to estimate the weighted average cost of capital. Since the FCFF model has a high growth and a long term terminal growth period, a unique beta was used for each of the periods. During the high growth period, AXTA’s beta is expected to be the same as its current beta of 1.51. This higher beta is a result of higher volatility than the industry, consistent with AXTA as a recent carve-out and subsequent public offering by the Carlyle Group. Additionally, due to AXTA’s growth strategy through M&A, price per share is expected to fluctuate more than its industry competitors. For the terminal period, AXTA is expected to reach the industry average beta of 0.90 as their sales growth stabilize.

Cost of Debt Due to a lack of market value of debt (L1), cost of debt was estimated, for WACC calculations, using AXTA’s current credit rating, BB, equivalent to 4.25% risk premium. To this, a 2.50% long term risk free rate based on a 30 year US Treasury’s yield was added. The market value of debt estimations are shown in Table 10.

Revenue GrowthRevenue growth was split into a high growth period and a long term terminal growth period. The initial high growth is calculated using our estimated return on equity times the reinvestment rate. As AXTA currently does not pay out any dividends, our reinvestment rate is set to 100%. The high growth is expected to last five years as AXTA undertakes more M&A and introduces new products as described by Christopher Mecray, VP Investor Relations. This high growth is expected to slow down between years 3-5 as AXTA nears their sustainable growth rate used for calculating the terminal value.

As modeled in Table 6 we have projected a terminal growth rate of 2.49% (L2) using risk-free rates from the different regions in which AXTA is present, representing the economic growth in these regions.

Terminal ValueThe terminal value was calculated by discounting all future cash flows back to today’s dollar using the above calculated growth rates and estimated betas. We believe it is reasonable for AXTA to mature within the 5-year time period, thereby slowing their growth rate to a sustainable rate similar to the economies in which they are present. The final estimated intrinsic value was a market value/share of $13.62.

Relative Multiples Valuation

While the DCF analysis provides the intrinsic value of a company based on internally generated cash flows, it does not take the current market’s investor sentiment into account. Therefore, relative multiples based valuations also merit a

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place in the final estimate of the target price for AXTA.

As a firms’ value should be independent of capital structure, the enterprise value multiples gives us a more accurate valuation of AXTA than would price to book numbers based multiples which can be biased estimates due to variations in accounting practices. The valuations have been calculated using corresponding industry multiples as a comparison to gauge objectively how the company is performing relative to the industry’s valuation in the current equity market. Relative price valuations are considered here as it relates to stock valuation, explaining why we decided to use some of these to come up with our final valuation target.

Table 10: MV of Debt

YTM 6.75%

LoanPrincipal Amount ($M)

Present Value ($M)

Euro Term $547.70 $433.37

Dollar Term $2,282.80 $1,774.52

Euro Note $394.90 $373.43

Dollar Note $750.00 $778.61

Total $3,975.40 $3,359.94

Table 11: Price MultiplesAs of Dec '15AXTA Industry Valuation

Enterprise Value/EBIT 16.56 16.31 $ 24.37 Enterprise Value/EBITDA 10.72 12.01 $ 43.61 Enterprise Value/Sales 2.28 1.80 $ 30.83 Price/Sales 1.55 1.47 $ 25.17 Price/Earnings 68.33 21.30 $ 8.30 Price/Book Value 5.90 5.01 $ 22.38 Price/Cash Flow 15.99 14.66 $ 24.36 Price/Free Cash Flow 24.43 23.15 $ 25.18

2013 2014 2015$0.00

$20.00

$40.00

$60.00

$80.00

$100.00

$120.00

$140.00

$160.00

$180.00

$200.00

Figure 22: Capital Expenditures ($M)

2013 2014 20150

1

2

3

4

5

6

7

8

9

10

Figure 23: Net Debt/EBITDA (X)

Financial Analysis

Table 12: Selected Key Financial ($M)2013 2014 2015

Revenue $4,314.10 $4,391.50 $ 4,113.30 Revenue Growth (%) 1.35% 1.79% -6.33%

Gross Income $1,229.20 $1,410.50 $ 1,435.30 Gross Income Growth (%) -7.17% 14.75% 1.76%Gross Margin (%) 28.49% 32.12% 34.89%

EBIT $ 73.60 $ 505.10 $ 565.20 EBIT Growth (%) -82.02% 586.28% 11.90%EBIT Margin (%) 1.71% 11.50% 13.74%

EBITDA $ 384.20 $ 813.80 $ 872.90 EBITDA Growth (%) -26.12% 111.82% 7.26%EBITDA Margin (%) 8.91% 18.53% 21.22%

Net Income $ (228.50) $ 27.40 $ 93.70 Net Income Growth (%) -206.63% 933.94% 241.97%Net Margin (%) -5.30% 0.62% 2.28%

Net Operating Cash Flow $ 339.10 $ 251.40 $ 399.60 Net Operating Cash Flow Growth (%) -13.58% -25.86% 58.95%

Capital Expenditures $ (116.00) $ (188.60) $ (138.10)Capital Expenditures Growth (%) -22.36% -62.59% 26.78%

Free Cash Flow $ 229.40 $ 63.00 $ 261.50 Free Cash Flow Growth (%) -28.13% -72.54% 315.08%

Table 13: Ratio Analysis2013 2014 2015

Liquidity Analysis

Current Ratio 1.95 1.98 2.17Quick Ratio 1.40 1.41 1.57

Profitability AnalysisOperating Margin 1.71% 11.50% 8.81%

Page 11 of 41

Return on Assets

Return on EquityCoverage Ratios

Net Debt/EBITDAEBITDA/Interest Expense

FCF/Total Debt

Stable Sales with Increasing Key MarginsWhile AXTA’s sales have been steady over the previous three-year period as in Table 12, the company has managed to improve its key margins through cost reduction. AXTA has seen growth in EBIT and EBITDA, as well as Net Income while maintaining sales of around $4.1 billion, indicating a strong cost control. Management has heavily focused on their variable cost structure and ability to maintain margins in Latin America, ensuring AXTA’s profitability in that region. Overall, the company has been increasing its profitability over the period, although this can be attributed to AXTA’s cost reduction effort as opposed to an increase in sales.

Strong EBITDA GrowthWhereas sales have been stable over the past three years, AXTA’s EBITDA has more than doubled to $872.90 million. The growth in EBITDA provides us with a clearer picture of AXTA’s operating profitability.

Improving Credit ProfileAs part of the carve out, AXTA was levied with $3.7 billion of debt, resulting in a 9.02x Net Debt/EBITDA ratio in 2013. Over the past three years, through repayment of debt, as well as refinancing of current debt through their U.S. headquarters and Dutch subsidiary, AXTA has been able to considerably reduce their Net Debt/EBITDA ratio and are well on their way to hit their target of 2.5x-3x. As Table 4 shows, this would still be the highest ratio among AXTA and their competitors.

2013 2014 20150

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

0.09

Figure 24: FCF/Total Debt (X)

Table 14: DuPont Analysis2013 2014 2015

Asset Turnover 0.90x 0.68x 0.68x

x Pretax Margin -6.06% 0.84% 3.92%

= Pretax Return on Assets -5.44% 0.57% 2.66%

x (1-Tax Rate) -- 94.29 60.73

= Return on Assets -4.75% 0.42% 1.55%

x (Assets/Equity) 3.48x 5.97x 5.72x

= Return on Equity -16.52% 2.52% 8.85%

Table 15: Monte Carlo Parameters

Number of Iterations 10,000

Growth Rate 6.19%

Std. Dev. 2.51%

Time to Terminal 5

Maximum $18.70

Minimum $8.80

Mean $13.62

Page 12 of 41

Through the refinancing and overall growth in EBITDA, AXTA has increased their EBITDA interest coverage ratio, demonstrating their ability to repay their debt.

Low Cash Flow to Debt RatioAlthough AXTA has been able to reduce and refinance their debt, as well as increase their key margins, they have still yet to generate any significant free cash flow in comparison to their total debt. AXTA has a 0.08x FCF/Total Debt for 2015, up .02x for the three-year period, which indicates AXTA is improving, however, their continued growth could still be hampered due to the significant amount of leverage added in 2013. The low FCF is partially due to high repayment and high capital expenditures on M&A.

DuPont AnalysisUsing the DuPont Analysis (Table 14), AXTA has shown a varying ROE since becoming a stand-alone entity in 2013. From 2013 to 2014, the main driving factors for the improvement were the additional debt AXTA was leveraged with due to the carve out, as well as improving profit margins. From 2014 to 2015, AXTA managed to improve their ROE to 8.85% by improving their profit margins, mainly attributed to their ability to lower costs through a variable cost structure.

Sensitivity Analysis – Monte CarloA Monte Carlo Simulation was performed to simulate the impact of revenue growth on the DCF intrinsic value estimate using the following variables: An average 6.19% and a standard

deviation 2.51% of 5-year annual growth rate.

A 5-year time to terminal period similar to our 5-year period in our original DCF intrinsic value (IV) calculation.

Based on a 10,000 iteration simulation, AXTA is a Sell as none of the simulated IV is above AXTA’s current market price.

Investment Risks

Market Risk

(M1) Potential Domestic Regulatory Policy Changes (Low Impact, Low Likelihood).With the new political administration just taking office, AXTA and its industry may see a change in regulatory policies. However, this is not expected to impact AXTA as the new administration is expected to loosen business regulations.

(M2) Global Market Exposure (High Impact, Medium Likelihood)As a global business, AXTA is subject to risks both domestically and internationally. Approximately 70% of their sales occurred outside the U.S. in 2015, potentially adding risk to their sales. This can currently be seen in the Latin American market. The company anticipates future sales growth because of their presence in emerging markets. Changes in economic conditions globally are the main threats to AXTA’s non-U.S. operations (K1).

(M3) Global, Decentralized Business Approach (Medium Impact, Low Likelihood)AXTA’s decentralized business approach in which each country has its own subsidiary, reporting back to AXTA U.S., has its benefits but presents itself with additional risk. In this business structure, headquarters do not always have the most up to date information. Additional potential risks include individual subsidiaries agency problems between divisions and AXTA as a whole.

(M4) Highly Competitive Market (High Impact, Low Likelihood)AXTA competes against other major companies in a highly competitive market where switching costs between companies are low. While AXTA is a major player in their segments, they compete against much larger firms, who potentially could steal away customers due to having a more diversified portfolio of products than what AXTA can currently offer.

Figure 26: Risk Matrix

Impa

ct HighM4/B2/C1

M2/C2/E1  

Medium

M3/B1/C1 E2  

Low M1/FX1    

Low MediumHigh

LikelihoodFigure 27: Investment Score Card

Category Weight RecommendValuation 50% Strong SellIndustry Growth 15% Strong SellOverall Economic Outlook 10% BuyDemand Driver Outlook 10% BuyCompetition 8% SellRelated Industries Outlook 4% Strong BuyManagement 3% NeutralOverall Recommendation 100% Sell

Page 13 of 41

Additional Risk FactorsCarlyle Group No Longer Controlling ShareholderDuPont was paid $4.9 billion in 2013 for their paint division by the Carlyle Group,

Business and Operational Risk(B1) Data Security Breaches (Medium Impact, Low Likelihood)Due to use of third party platforms to perform specific business and administrative functions, AXTA opens themselves up to security breaches they cannot control. This could lead to damaged reputations and/or monetary damages, result in financial losses to the company.

(B2) Risks Related to Outsourcing (High Impact, Low Likelihood)A failure to correctly implement current outsourcing strategies combined with new strategies proving to be inefficient could potentially harm the company. If said strategies do not perform expected cost savings, AXTA would have unintentionally harmed their financial standing and potentially their reputation (K1).

Credit Risk(C1) Default on Payments (High/Medium Impact, Low Likelihood)AXTA offers their customers a variety of financial tools to help finance their purchases. Payment plans can be an incentive for sales. With these payment plans, AXTA exposes themselves to default risk through their captive finance operations. The risk of customer default may be somewhat offset by the potential increase in customer loyalty and sales.

(C2) Derivative Instruments (High Impact, Medium Likelihood) AXTA uses derivative instruments, subjecting themselves to credit and market risk, which can lead to increased receivables, conversely, it can lead to losses. Additionally, AXTA faces default risk/risk of non-performance by counterparties in derivative agreements. As of year-end in 2013, AXTA has negotiated five interest rate swaps that totaled $1,173 million to hedge against interest rate exposure, which will be in place until September of 2017 (K1).

Economic Risk(E1) Sale of AXTA’s Products (High Impact, Medium Likelihood)The condition of the overall economy has an impact on the sale of

automobiles, which directly correlates to AXTA’s light vehicle OEM coatings. Similarly, a weaker economy in regions such as Latin America that is expected to have a GDP growth of -13% in 2017 will lead to a decrease in industrial production, and as a result, a decline in AXTA’s sales. Lastly, a downturn in the economy would cause consumers to be less inclined to do cosmetic repairs to their current vehicles, further driving down sales of AXTA, particularly in the performance coating segment.

(E2) Slowing Growth Through M&A (Medium Impact, Medium Likelihood)AXTA has previously engaged in inorganic growth through M&A, acquiring six companies since the carve out in 2013. With AXTA indicating they could start paying out dividends in Q2 2017, this likely means AXTA sees the current M&A market as unattractive, leading them to seek growth elsewhere (K1).

Currency Risk(FX1) Transaction Exposure Risk (Low Impact, Low Likelihood)AXTA is less exposed to currency risk due to the structure of their business. They are not exposed to much transaction exposure as each global AXTA office operates independently, thereby only subjecting AXTA U.S. to translation exposure as an accounting measure. In December of 2014 and 2015, AXTA was exposed to a cumulative translation loss of $164.2 million and $101.1 million, respectively. Essentially, this only affects AXTA on a U.S. reporting scale. The high sensitivity of translation exposure could result in an additional loss of $30 million if the U.S. dollar appreciates 10% relative to other foreign currencies (K1).

Page 14 of 41

Additional Risk FactorsCarlyle Group No Longer Controlling ShareholderDuPont was paid $4.9 billion in 2013 for their paint division by the Carlyle Group,

Disclosures:Ownership and material conflicts of interest:The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company.The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation:Compensation of the author(s) of this report is not based on investment banking revenue.Position as an officer or director:The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company.Market making:The author(s) does not act as a market maker in the subject company’s securities.Disclaimer:The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society of Philadelphia, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

Page 15 of 41

APPENDIX A1: AXTA CommitteesExecutive Committee Title

Greg Ledford Member

Charlie Shaver Chair

Audit Committee Title

Mark Garrett Member

Lori Ryerkerk Member

Robert McLaughlin Chair

Compensation Committee Title

Andreas Kramvis Chair

Greg Ledford Member

Martin Sumner Member

Nominating & Corporate Governance Title

Greg Ledford Member

Martin Sumner Chair

Source: ISS Governance

APPENDIX A2: Governance Rating

AXTA corporate governance position is analyzed according to the standards of United States Securities and Exchange Commissions and the Institutional Shareholder Service (ISS) Rating Methodology. AXTA ratings is illustrated below:

Executive Management-3

Successful transition of AXTA from the carve out to a single entity; however, there are still some threats on the company’s debt and its direction to pay out dividends.

Board of Directors-2

With The Carlyle Group selling its remaining stake on AXTA, the Board of Directors is no longer under Carlyle’s influence and control of to appoint new management or the direction of the company

Shareholder Rights-3Page 16 of 41

Ratings on threat to Shareholders:

1 Insignificant threat

2 Low threat

3 Moderate threat

4 Significant threat

5 High threat

Under the laws of Bermuda, shareholders have limited rights to take action against the directors or officers, except for fraud or dishonesty. Thereby, making it difficult to protect shareholder’s interest.

Audit and Risk Transparency-2

Audits its financial reports according to the standards of the Public Company Accounting Oversight Board. AXTA provides audited reports and unaudited pro forma information for investors to evaluate the company’s position.

Takeover Defenses-2

The Bermuda Law created anti-takeover provisions, which makes control from third party difficult without the permission from the Board of Directors. The anti-takeover provisions result to a delay from change in control and places restrictions on the time and reason to remove directors

Average score: 2.6

Our rating is based on the Institutional Shareholder Service (ISS) Rating Methodology

Four Pillars Governance RiskBoard Structure LowCompensation LowShareholder Rights MediumAudit and Risk Oversight LowAXTA Rating Low

Source: ISS Governance

APPENDIX A3: Top Management Executives

Executive Title History at AxaltaCharles W. Shaver

Chairman & CEO Starting in 2013, Mr. Shaver became the Chairman of the Board and CEO of Axalta. He has over 35 years of experience in the global petrochemical, oil, and gas industry. Prior to Axalta, he was the Vice President and General Manager of General Manager from 2001 to 2004. With a wide range in experience, he also on the American Chemistry Council Board of Directors and Finance Committee and the National Petrochemical and Refiners Association Board and Executive Committee

Robert Bryant Executive Vice President & Chief Financial Officer Before joining Axalta, Mr. Bryant was the Chief Financial Officer and Senior Vice President of Roll Global LLC. He was also with Grupo Industrial Saltillo in 2004, where he was the Executive Vice President of Strategy, New Business Development, and Information Technology department.

Page 17 of 41

Nigel Budden Vice President, North America Region Mr. Budden holds a diverse leadership position in his career from the Country President of DuPont Korea, Regional Business Director of Corian in Singapore, and Regional Marketing leader in China. Prior to Axalta, he was with E.I. du Pont de Nemours and Company in 1980.

Michael Carr Vice President and President, North America Mr. Carr’s early career was with Exide Technologies, Armstrong World Industries and General Battery Corporation. Before Axalta, he was the Vice President and General Manager for the United States and Canada at Johnson Controls Power Solutions division.

Michael A. Cash Senior Vice President and President, Industrial Coatings

Mr. Cash was the Managing Director for the Asia-Pacific Region at AkzoNobel Coatings and was responsible for powder business in the Americas. Mr. Cash’s experience at The Sherwin-Williams Company in the Automotive International and Automotive Marketing provides a competitive advantage to Axalta.

Jorge Cossio President, Latin America Region Mr. Cossio has over 30 years of experience in the pharmaceuticals, titanium dioxide, fibers and coatings industries. He also has extensive experience in the Pharmaceuticals business in areas such R&D, Production, SHEA, Planning and Sales. Mr. Cossio has also been in the HR division in positions such as Manager of Compensation and Benefits and HR Manager for the TiO2 business.

Page 18 of 41

Michael F. Finn Senior Vice President & General Counsel Mr. Finn was previously the Vice President and General Counsel of General Dynamics’ Advanced Information Systems subsidiary before joining Axalta. He has held various counseling positions in companies such as General Dynamics Corporation and Teligent Inc.

Martin Horneck Senior Vice President & Chief Procurement and Logistics Officer

With experiences in the automotive industry, he was recently at TRW Automotive as the Vice President of Global Purchasing, Supplier Development, and Logistics. He has also been the Executive Vice President of Global Purchasing at GETRAG Group.

Dan Key Senior Vice President Operations and Supply Chain Mr. Key has his expertise in the supply chain area of the business. He was with Sigma Aldrich, serving as the Vice President and Chief Supply Chain Officer. At Sigma Aldrich, he was responsible for 53 operating sits that combines more than 5,000 employees.

Luke Lu Vice President and President, China Mr. Lu has had a wide range of responsibilities in his area from business development, marketing and sales. From 2007 to 2013, he was the President of the Asia-Pacific region at Exide Technologies where he led the company in the industrial transportation and energy sector. Most recently, he was the Vice President in the Power Solutions Asia-Pacific region at Johnson Controls.

Steven R. Markevich

Executive Vice President and President, Transportation Coatings and Greater China

Mr. Markevich has been with companies such as GJN Driveline and Siegel Robert Automotive. He was responsible for providing solutions in the commercial strategy, sales, account and program management initiatives at Siegel Robert Automotive. He holds various leadership roles that affiliates with senior level customers.

Page 19 of 41

Joe McDougall Senior Vice President, Global Branding, Corporate Affairs, and Chief Human Resources Officer

Before being part of Axalta, Mr. McDougall was the Vice President, HR, and Communications and Six Sigma at Honeywell Performance Materials and Technologies. At Honeywell, he was also the Vice President, Human Resources for the Air Transport Division.

Chris Mecray Vice President, Investor Relations Prior to Axalta, Mr. Mecray was at Blackrock Inc. as the Vice President Senior Analyst focusing in areas of the global industrial, basic materials, and coatings. He also at Deutsche Bank between 1995 to 2004, specializing in analyzing industrial companies.

Rajeev Rao Vice President, Strategy and Business Development Mr. Rao has extensive experience in the industry by providing consulting in the chemical sector. In 2012, he was at Halliburton Company as the Senior Director, Strategy and Marketing for the company’s Drilling and Evaluation Division. He was also with McKinsey & Company for six years, where he led the North America Chemicals Practice.

Matthias Schonberg

Vice President and President, Europe, Middle East & Africa

Mr. Schonberg’s most recent position was the CEO of ContiTech Fluid Technology business and Executive Vice President of Continental AG. He has had an abundant of senior level positions. In addition, his past roles at Continental were CEO and Business Head of the Unit Replacement unit in the Americas.

Page 20 of 41

Sobers Sethi Vice President, South and East Asia Region Mr. Sethi attains 12 years of experience in the coatings industry and 20 years in the automotive industry. He career is dominated in the Asia-Pacific region where he was the held positions such as DPC Sales Director Asia-Pacific and Business Director Asia-Pacific, Business Manager Industrial Coatings Asia-Pacific, and Strategic Planning Manager for DPC Asia-Pacific.

Barry Snyder Senior Vice President & Chief Technology Officer Mr. Synder’s previous position was with Orion Engineered Carbons, serving as the Senior Vice President and was responsible for global R&D and quality assurance. His experience varies from the manufacture of paints and coatings, plastics, printing inks, adhesives, sealants, and tires.

Aaron Weis Vice President, Chief Information Officer Mr. Weis started his career at Siemens, where he was responsible for managing information technology. His previous position before Axalta was at Sensata Technologies, where he was the Vice President & General Manager in the Magnetic Speed and Position business.

Matthew N. Winokur

Vice President, Corporate Affairs Mr. Winokur is specialized in the roles of government regulations and public affair. His recent position was at Ogilvy Public Relations as the Executive Vice President in which he was responsible for developing global reputation campaigns for government and corporate clients.

Source: Axalta Coating Systems

Page 21 of 41

APPENDIX A4: Board Members

Member Independent Career BackgroundCharles W. Shaver, 57 No Refer to Executive Appendix

Mark Garrett Yes Mr. Garrett, with 30 years of experience in the chemical sector, is the Chief Executive of Borealis AG, a provider of solution in areas such as polyolefin, base chemicals, and fertilizers. Before his position at Borealis, Mr. Garett was an Executive Vice President Water and Paper Treatment at Ciba Specialty Chemicals.

Andreas Kramvis Yes Mr. Kramvis is the Vice Chairman of Honeywell Inc., a Fortune 100 company in the diversified technology and manufacturing. Before his position at Honeywell Inc., Mr. Kramis has served as the President and Chief Executive Officer of Honeywell Performance Materials and Technologies, and the President of Honeywell’s Environmental and Combustion Controls business. In addition to Axalta, Mr. Kramvis served on the board of the AptarGroup Inc.

Gregory S. Ledford Yes Mr. Ledford joined Carlyle Group in 1988 and is currently the Managing Direction and head of the Industrial & Transportation team. From 1991 to 1997, Mr. Ledford was the Chairman and CEO of Reilly Corporation. He is also a member of board at Allison Transmission, Genesee & Wyoming, Greater China Industrial, HD Supply, and Veyance Technologies.

Robert M. McLaughlin Yes Mr. McLaughlin has a plethora of experiences in the financial sector. He started his career at Ernst & Young in 1979 and have transitioned in 1992 to Unisource Worldwide as Vice President of Finance. Currently, Mr. McLaughlin is the Senior Vice President and Chief Financial Officer at Airgas, a company that is a supplier of industrial, medical and specialty gases and hardgoods product.

Lori J. Ryerkerk Yes Ms. Ryerkerk, an Executive Vice President in the Global Manufacturing department at Royal Dutch Shell. In the department, she is responsible for Shell Refining and Chemical assets globally. Before her career at Shell, she was with ExxonMobil Corporation and Hess Corporation

Page 22 of 41

Sam Smolik Yes Mr. Smolik has various experiences in the chemical and refining industry. He is currently the Senior Vice President at LyondellBasell Industries. Prior to LyondellBasell Industries, he was the Vice President at Royal Dutch Shell where was part of the Global Downstream Health, Safety, Security and Environment department.

Martin Sumner Yes Mr. Sumner is current the Managing Director of the Carlyle Group, where he was responsible for seeking US buyout opportunities in sectors such as industrial and transportation. He was also involved in Carlyle’s investments with Allison Transmission and Veyance Technologies.

Source: Axalta Coating Systems

APPENDIX A5: Top 15 Institutional Owners

According to FactSet, AXTA’s top 15 institutional holders are the following:

9.75%

6.78%

6.15%

3.19%3.08%2.96%

2.51%

2.34%

2.21%

1.93%1.85%

1.84%1.80%1.75%1.67%

Top 15 Institutional Owners (% S/O)

Berkshire HathawayThe Vanguard GroupIridian Asset ManagementDiamond Hill Capital ManagementFranklin AdvisersBlackRock Fund AdvisorsBlackRock AdvisorsDeccan Calue InvestorsSQ AdvisorsWilliam Blair Investment ManagementGoldman Sachs Asset ManagementJennison AssociatesMassachusetts Financial ServicesGates Capital ManagementMillennium Management

Source: FactSet

Page 23 of 41

APPENDIX B1: Porter’s Five Forces

Bargaining Power of Buyers – Moderate: Switching costs in terms of dollar value are low for AXTA’s products. OEMs and local shops can switch AXTA’s coating equipment out fairly cheaply which would indicate a high threat. However, costs of re-training are high and most OEMs and local shops are not willing to go through this. Relatively speaking, there are few customers who purchase in large quantities. Industry products are diversified, however, company specific equipment is not compatible with competitor products. There is low excess supply as many companies, and AXTA, create their products in small batches to avoid high inventory costs. Lastly, buyers do not have a credible threat as it relates to backward integration into the industry.

Intensity of Competitive Rivalry – Moderate: This industry is dominated by few, large-scale producers of roughly the same size in the industry. It is not a growth industry, and while costs can be somewhat high, most of AXTA’s costs are variable due to small batch production and keeping inventories low.

Bargaining Power of Suppliers – Moderate: The supplier industry is more concentrated than the general coating industry. This indicates the power of suppliers is high and could have the ability to drive prices up, as AXTA and related companies are dependent on them. However, supplier products are undifferentiated giving the buying firms more power to switch between suppliers.

Threat of Substitutions – Minimal: In terms of product substitutions, there are no real alternatives to the products offered. OEMs and local shops, as well as end costumers, are dependent on actual car paint to put on their cars. Thus far, no real alternative has emerged, illustrating no real substitute for the products provided by the firms in the industry.

Threat of New Entry – Minimal: The performance and industrial coating industry is a highly capital intensive industry requiring expertise and equipment not easily accessible for low costs. As such, this industry is protected against new entrants. Additionally, this is not considered a growth industry, further protecting AXTA, and its competitors, from the threat of new entry.

Page 24 of 41

Bargaining Power of Buyers

Threat of New Entry

Threat of SubstitutionsBargaining Power of Suppliers

Intensity of Competitive Rivalry

0

5

Porter's Five ForcesLegend   0 No Threat to AXTA1 Minimal Threat to AXTA2 Low Threat to AXTA3 Moderate Threat to AXTA4 Significant Threat to AXTA5 High Threat to AXTA

APPENDIX C1: SWOT Analysis

AXTA’s SWOT Analysis was created to assess the company’s competitive position relative to other competitors in the coating industry. The radar charts below are based on subjective values, ranking each category on a 3-point scale in terms on AXTA’s strengths and weaknesses compared with their competitors. The totals for each of the SWOT category were summarized in the final SWOT chart.

Financial Resources

Reputation

Competive Advantage i.e TechnologyManagement & Governance

Cost Structure

0

1

2

3

Strengths Rating

Strategies

Management & Governance

Internal Operations

Product

Brand Image

Profitability

0

1

2

Weaknesses Rating

Page 25 of 41

Strengths

Weaknesses

Opportunities

Threats 0

10

20

Strengths Weaknesses Global presence Large market share

within their industry Technology

competitive advantage Highly variable cost

structure

Large outstanding debt due to recent carve out.

Recent decline in sales

Relatively inexperienced as standalone entity

Opportunities Threats Increasing demand in

emerging markets, as well as expansion into these markets.

Expansion into other coating industries

Growth through M&A

Highly competitive environment.

Product sales highly dependent on external factors.

Technological advancements

Increasing regulation

M&A

Product Line Expansion

Facilities Expansion

Regulatory Overhead

Rival Complacency

Continued International Expansion

0

1

2

3

Opportunities Rating

APPENDIX D1: Worldwide Vehicle Sales and Production

The following tables were used to calculate all statistics in the demand driver section not separately cited. Any growth calculations were calculated by finding the geometric mean of year over year growth rates as stated in the paper.

The commercial vehicle production table consists of worldwide commercial vehicle production and the data and projections within it are based off of OICA models. Taking a geometric mean of the data from 2000- 2017 produces a CAGR of 1.7%. Commercial vehicle production drives AXTA’s commercial vehicle paint sales, as commercial vehicles are the end market of this product (2015 10-K).

Commercial Vehicle Production (in millions)

Year Commercial vehicles

2000 17.17

2001 16.48

2002 17.64

2003 18.69

2004 19.94

2005 19.67

2006 19.3

2007 20.06

2008 17.89

2009 13.99

2010 19.34

2011 19.92

2012 21.17

2013 21.86

2014 22.22

2015 22.12

Page 26 of 41

Competiveness

Cyclical Trends

Technological Advancements

Product Standards

Industry Stagnation

Pricing

0

1

2

Threats Rating

Source: OICA

The US freight trucking industry growth table consists of total revenue growth in the US freight trucking industry and is based off of data acquired by IBIS World. Taking a geometric mean of the data from 2011-2015 shows a CAGR of 1.9%. We used trucking industry growth as an indicator of the overall health of the economy and industrial production, both of which drive demand for AXTA’s industrial coating product. (2015 10-K).

U.S Freight Trucking Industry Revenue Growth (%)

Year Revenue Growth

2004 7.30%

2005 7.10%

2006 7.20%

2007 3.10%

2008 -2.00%

2009 -6.00%

2010 1.00%

2011 1.10%

2012 1.20%

2013 2.70%

2014 1.80%

2015 2.90%

2016 2.40%

2017 2.30%

Source: IBIS World

The worldwide light vehicle production table contains data and projections from PwC. Taking a geometric mean of the data from 2012-2015 produces a CAGR of 3.3% and taking a CAGR from 2016-2020 shows a projected CAGR of 3.9%. Light vehicle production drives the demand for AXTA’s light vehicle coating sales because, assuming AXTA maintains their current market share, as the light vehicle production increases so will the need for light vehicle coating system (2015 10-K).

World Wide Light Vehicle Production (in millions)

Year Light Vehicle Sales

2012 80.30

2013 83.90

2014 86.30

Page 27 of 41

2015 88.60

2016 93.20

2017 98.00

2018 102.10

2019 105.60

2020 107.40

Source: PwC

The Bric Vehicle Sales (in units) table contains the number of vehicle sales in the four largest emerging economies Brazil, Russia, India, and China from 2005-2015. Taking a geometric mean of the total vehicle sales from 2005-2015 provides a CAGR of 11.56%. Because vehicle sales is correlated with AXTA’s sales 11.56% demonstrates that AXTA’s presence in emerging economies will help grow their future sales.

Bric Vehicle Sales (in units)Yea

r Russia India Brazil China Total

2005 1,806,625 1,440,455 1,714,644 5,758,189 10,719,9132006 2,244,840 1,750,892 1,927,738 7,215,972 13,139,4422007 2,898,032 1,993,721 2,462,728 8,791,528 16,146,0092008 3,222,346 1,983,071 2,820,350 9,380,502 17,406,2692009 1,597,457 2,266,269 3,141,240 13,644,794 20,649,7602010 2,107,135 3,040,390 3,515,064 18,061,936 26,724,5252011 2,901,612 3,287,737 3,633,248 18,505,114 28,327,7112012 3,141,551 3,595,508 3,802,071 19,306,435 29,845,5652013 2,998,650 3,241,302 3,767,370 21,984,079 31,991,4012014 2,592,396 3,177,005 3,498,012 23,499,001 32,766,4142015 1,437,930 3,425,336 2,568,976 24,597,583 32,029,825

Source: OICA

Page 28 of 41

APPENDIX E1: Worldwide Economic Growth

The following tables were used to calculate all statistics in the economic growth and improved sales growth section not that are not separately cited. Any growth calculations were calculated by finding the geometric mean of year over year growth rates as stated in the paper.

The GDP Growth Rate (%) table shows the GDP growth rate of the Asia Pacific and Middle East/North Africa world regions. The data contained within the table as well as any projections are based off of OECD models. Taking a geometric mean for the Asia Pacific region for 2013-2015 provides a CAGR of 6.7% and for 2016-2018 provides a forecasted CAGR of 6.1%. Taking a geometric mean from the Middle East/ North Africa region for 2013-2015 shows a CAGR of 2.5% and for 2016-2018 shows a forecasted CAGR of 3.3%.

GDP Growth Rate (%)Year Asia-Pacific Middle East/ North Africa2013 7% 2%2014 6.8% 2.9%2015 6.5% 2.6%2016* 6.3% 2.9%2017* 6.2% 3.5%2018* 6.1% 3.6%

Source: OECD

The European Union GDP Growth Rate (%) table shows GDP growth for the European union from 2010 and contains projections going out to 2020. The data and projections are numbers based off of IMF numbers. Taking a geometric from 2010-2015 shows a CAGR of 1.19% and a geometric mean for 2016-2020 projects a CAGR of 1.87%.

European Union GDP Growth Rate (%)

Year European Union

2010 2.02%

2011 1.83%

2012 -0.40%

2013 0.28%

2014 1.45%

2015 1.99%

2016* 1.84%

2017* 1.95%

2018* 1.87%

2019* 1.87%

2020* 1.83%Source: IMF

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The GDP in world regions (in billions) table shows the GDP of North America and Latin America from 2010 and includes projections out till 2020. Taking a geometric mean for Latin America from 2010-2015 shows a CAGR of -.16% and for 2016-2020 projects a CAGR of 1.38%. Taking a geometric mean for North America from 2010-2015 provides a 3.39% CAGR and for 2016-2020 provides a 3.96% CAGR.

GDP in World Regions (in billions)GDP Latin America North America2010 $ 5,094.18 $ 16,577.86 2011 $ 5,918.17 $ 17,306.58 2012 $ 5,929.78 $ 17,979.54 2013 $ 5,994.43 $ 18,528.94 2014 $ 5,928.51 $ 19,176.88 2015 $ 5,052.49 $ 19,587.19 2016* $ 5,403.96 $ 20,094.27 2017* $ 4,653.56 $ 21,004.50 2018* $ 4,846.50 $ 21,951.31 2019* $ 5,115.78 $ 22,881.59 2020* $ 5,409.78 $ 23,782.21

Source: IMF

The table GDP Bric Countries ($B) shows GDP data from 2010 and includes GDP projections until 2020, put forth by the IMF. Taking a geometric mean of the totaled IMF’s projections shows a forecasted CAGR of 5.05%. AXTA is present in major emerging economies, so we chose to pull data from the four largest Brazil, Russia, India and China and concluded it will help AXTA grow their future sales.

GDP Bric Countries ($B)Year Brazil Russia India China2010 $ 2,208.71 $ 1,626.57 $ 1,708.46 $ 6,005.25 2011 $ 2,612.40 $ 2,031.77 $ 1,822.99 $ 7,442.03 2012 $ 2,459.53 $ 2,171.74 $ 1,828.98 $ 8,471.36 2013 $ 2,464.69 $ 2,231.84 $ 1,863.21 $ 9,518.58 2014 $ 2,417.16 $ 2,029.62 $ 2,042.56 $ 10,430.71 2015* $ 1,772.59 $ 1,324.73 $ 2,090.71 $ 10,982.83 2016* $ 1,534.78 $ 1,132.74 $ 2,288.72 $ 11,383.03 2017* $ 1,556.44 $ 1,267.55 $ 2,487.94 $ 12,263.43 2018* $ 1,608.74 $ 1,355.36 $ 2,724.76 $ 13,338.23 2019* $ 1,677.46 $ 1,447.13 $ 3,006.95 $ 14,605.29 2020* $ 1,749.35 $ 1,530.61 $ 3,315.36 $ 16,144.04

Source: IMF

APPENDIX F1: Industry and Competitors

Total Industry Market Share In Revenue Dollars (billions) PercentagePPG Industries $ 15.30 12%RPM Inc $ 4.60 4%Axalta $ 4.10 3%Sherwin-Williams $ 11.40 9%Valspar $ 4.40 3%Other $ 88.50 69%

Source: FactSet

Top Competitors Sales Comparison Dollars (billions) PercentagePPG Industries $ 15.30 39%RPM Inc $ 4.60 12%Axalta $ 4.10 10%Sherwin-Williams $ 11.40 29%Valspar $ 4.40 10%

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Source: FactSet

Competition Market Values Comparison Dollars (millions)PPG Industries $ 25,336.00 RPM Inc $ 7,019.00 Axalta $ 6,776.00 Sherwin-Williams $ 26,419.00 Valspar $ 8,518.00

Source: FactSet

APPENDIX G1: Chinese Growth Forecast

Bloomberg: The International Monetary Fund upgraded its growth forecast for China’s economy in 2017 to 6.5 percent, 0.3 percentage points higher than their October forecast, on the back of expectations for continued government stimulus.The most important market news of the day.Source: Bloomberg

As of 2015, China had a GDP increase of 7.9% a year, by having a lower projected growth rate, it indicates that China will not record as high of revenue in 2017. Bloomberg stated “The International Monetary Fund upgraded its growth forecast for China’s economy in 2017 to 6.5 percent, 0.3 percentage points higher than their October forecast, on the back of expectations for continued government stimulus.” With a lower projected GDP, China will expect to have reduce capital spending, hurting the sales and development of many industries such as; automotive and industrial industries, which directly hurts the growth of AXTA. According to Factset (Figure 19), AXTA has over 29% of their annual revenue from all market industries coming from emerging markets. With China being the largest country in the Asia Pacific region (6.9% total global industry revenue) this represents a major threat to the paint and coating industry. The industry might see some decreases in growth in those regions by 2017.

Eulerhermes Economic outlook: the global automotive market China remains the largest car market in the world, producing selling almost 21 million new cars in 2015. This accounts for 27% of global sales. Even with such a high volume in car sales, China’s automotive industry growth was only 8% in comparison with the 10% growth in 2014. In order to maintain the stable growth with previous years, China had to reduce prices to increase volume.  Other markets are also reporting decreases over the economic difficulties that countries had been facing over last several years. The US and some other markets have been reducing their workforces by 20% to maintain the same levels of profitability due to the big movements in exchange rates. Europe is expected to produce over 12.9 million new cars sales, giving the market a growth of 5%. Despite this growth, sales are still down 15% in comparison with sales before the 2009 financial crisis.The countries that will be important to watch for are Brazil, Russia, and India. India will be projecting small growth of 3%. Despite the small growth, the profitability of sales should be high due to the ultra-low cost vehicles becoming widely popular. The biggest concern for the industry lies in Brazil as well as the other Latin American markets. With the Brazil and other countries recently being in recession in 2013, the annual vehicle registrations were down 10%. These markets provide AXTA both with plenty of opportunities as well as threats to their global markets. With light vehicles and refinishing the largest industries for AXTA, they must depend on the future of the global automotive industry.Bottom of Form

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APPENDIX H1: Refinish Performance

Looking at the statistics of car crashes from the US Highway and roads division, on an annual basis over the last 5 years there has been a constant increase of about 1.5-2% per year. With the number of people killed on an annual basis, this indicates that most crashes come from bumper to bumpers. These type of crashes tend to require repairs from body shops. The five-year projection for jobs in the repair industry are estimated to be greater than 180,000. With auto repair body shops being the largest customer of AXTA in their refinished business, it is fair to project that this will continue to expand as a market.

APPENDIX I1: DOL/DFL

With a diminishing market in South America, projected decrease in GDP growth in China, and mature market in the US, the paint and coating industry is going to have to develop their cost structure to strength profit margins. As of now the leaders in the industry are using the decrease in sales as way to restructure their operations costs, hence why we are seeing negative DOLs from 4 of the top industries. With stables/reduction in industry average sales over the last couple of years, it is crucial for the industry to cut costs to maintain profitability. The DFL establishes how volatile earnings per share are in comparison with EBIT. With 1.0 being the stable (benchmark) the industry average is 1.2x, slightly higher due to the nature of the industry.

APPENDIX J1: Improving Sales Growth

AXTA’s cost reduction and consolidation efforts have succeeded in raising or maintaining their EBITDA. However, any increase in EBITDA should not be viewed as real growth as cost reductions are not a sustainable way to grow their business. Instead, sales growth is a more telling metric, which, for AXTA, has remained relatively constant over the last couple of years.

APPENDIX K1: Investment Risks

Market RiskAXTA is exposed to market risks as identified by AXTA in their 10-K. AXTA is considered to be operating on a global basis, having approximately 70% of their net sales coming from outside of the U.S. market. The company explained in their 10-K that in order to expand their operations in the future they will have to rely on demands for their products from customers in emerging markets. Also, changes in the economic conditions could play a role in the demand for products in the future, which includes the Venezuelan operations.

Business and Operational RiskAXTA’s business risk could impact the company’s data and information technology infrastructure, which in the long run can affect its reputation with customers and suppliers. In addition, the degradation in reputation affects material liabilities, which results to delay in product delivery and raw materials. AXTA has also implemented infrastructure to limit cyber-attack, theft and security breaches.As for AXTA’s operational risk, it is dependent on the ability of the company to develop new products and services that would be able to meet the demands in the market. The company has developed operating and marketing solutions to improve the importance of business productivity. Furthermore, AXTA has strategic plans to face challenges such as delay in product development, regulatory approvals, manufacturing process, intellectual property protection, and market entry of new products and services. AXTA’s inability to develop new product and processes could adversely impact financial results. On the other hand, AXTA is aware that the production and sales of new products could cannibalize existing products and sales. is aware that the production and sales of new products could cannibalize existing products and sales.

Credit RiskTo protect the company from potential credit risk, AXTA has implemented payment options for customers such as pre-bates and loans. In addition, AXTA also limits credit risk by guaranteeing payments to a third party. Customers’ inability to pay adversely impacts AXTA’s financial results as well as the business and operations. Furthermore, customers who purchase a significant portion of AXTA’s product could immensely impact AXTA’s financial standing. For instance, in 2015, one of AXTA’s largest customers and distributor accounted for 7.6% and 3.3% of net sales, respectively. The default on AXTA’s largest customer and distributor changes AXTA’s business conditions, product requirements, and marketing strategies.

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Economic RiskAXTA’s domestic and global financial results are strongly tied to the growth and economic conditions.   The company’s non-US operations are subject to the change in trade, monetary and fiscal policies, and laws and regulations, which can impact AXTA’s growth. In addition, AXTA’s international operations are dependent on a country’s stability and risks in regards to terrorism, political hostilities, war, and civil disturbances. AXTA’s domestic operations are subject to different culture and business practices. Therefore, AXTA has created employment policies and compensation programs that implies with the law in order to mitigate volatility in its operations. 

Currency RiskAccording to the 2015 10-K AXTA’s translation lost for 2014 and 2015 was $164.2 million and $101.1 million, respectively. And if the U.S dollar were to appreciate 10% relative to foreign currencies it would expose AXTA to a loss of $30 million. (2015 10-K)Source: AXTA 10-K

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APPENDIX L1: MV of Debt

The MV of Debt was estimated using AXTA’s YTM and finding the present value of their current outstanding bonds. According to our estimations, AXTA still has around $3.3 billion in debt outstanding.

MV of Debt Yield to Maturity 6.75% (2.50% Risk free + 4.25% BB rating)

Loan Principal Amount ($M) Coupon Rate Coupon Payment Payment Frequency Length (Years) Present ValueEuro Term $547.70 3.000% $16.43 Monthly 7 $433.37 Dollar Term $2,282.80 2.750% $62.78 Monthly 7 $1,774.52 Euro Note $394.90 5.750% $22.71 Annual 7 $373.43 Dollar Note $750.00 7.375% $55.31 Semi-Annual 8 $778.61

$ 3,975.40 $3,359.94 APPENDIX L2: Estimated Stable Growth Rate

The stable growth rate was estimated using long-term risk free rates from all regions in which AXTA is present. These growth rates were weighted according to AXTA sales in each region to come up with an estimated 2.49% stable growth rate.

Estimated stable growth rateSuper-Region Tool Growth Rate Weight Weighted Growth RateAmericas 30-Year Treasury 2.50% 47.60% 1.1900%Europe 30-Year government bonds 1.50% 28.20% 0.4230%Asia-Pacific CGBI 20 Year index 3.34% 17.30% 0.5778%Africa/Middle East CITI Gov't Index 4.36% 6.90% 0.3008%

100.00% 2.49%APPENDIX L3: Company Options Estimations

The AXTA management options were estimated using numbers found in the 2015 10-K. These calculations became a part of the final valuation model seen below.

2013 & 2014 optionsPrice # shares (M) Years Total Value Weight Average price Weight*years

2013 $ 5.94 2.8 6.5 $ 16.63 14.58% $0.87 0.952013 $ 8.88 5.4 8.25 $ 47.95 28.13% $2.50 2.322013 $ 11.94 6.4 8.25 $ 76.42 33.33% $3.98 2.752014 $ 7.21 1.6 6.5 $ 11.54 8.33% $0.60 0.542015 (See Below) $ 30.07 3 6.5 $ 90.21 15.63% $4.70 1.02

19.2 100.00% $12.64 7.58

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2015 Options# shares (M) Price low Price high Vested in Max life Weight

Service Based 1.3 $ 25.34 $ 34.80 3 10 43.33% $ 13.03 Stock Awards 0.9 $ 25.34 $ 34.80 3 10 30.00% $ 9.02 Stock Units 0.8 $ 25.34 $ 34.80 3 10 26.67% $ 8.02

3 average price = $ 30.07 Average life 6.5 100.00% $ 30.07 APPENDIX L4: Stock Price Volatility

Stock price volatility was found in the 2015 AXTA 10-K. The weighted volatility was found using number of shares left in each of the separate management options AXTA has outstanding.

Stock Price VolatilityVolatility # Shares (M) Weight Weighted volatility

2013 28.61% 14.6 76.04% 21.76%2014 28.28% 1.6 8.33% 2.36%2015 22.91% 3 15.63% 3.58%

19.2 27.69%APPENDIX L5: Financial Model Master Inputs

The following shows our FCFF DCF model. Appendix L5 contains the master inputs.

Master Input SheetDo you want to capitalize R&D expenses? NoDo you want to convert operating leases to debt? YesDo you want to normalize operating income? No

InputsFrom Current FinancialsCurrent EBIT = $565.20 Current Interest Expense = $189.50 Current Capital Spending $138.10 Current Depreciation & Amort'n = $307.70 Effective tax rate (for use on operating income) 39.27%Marginal tax rate (for use on cost of debt) 35.00%Current Revenues = $4,113.30 $4,391.50Current Non-cash Working Capital = $1,296.50

Chg. Working Capital = ($191.10)Previous year-

end Book Value of Debt = $3,391.40 $3,656.30

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Book Value of Equity = $1,073.70 $1,044.70

Cash & Marketable Securities = $487.70 $386.80 Value of Non-operating Assets = $4.20 $4.50 Minority interests $67.50 $67.30

Market Data for your firmIs your stock currently traded? YesIf yes, enter the following:Current Stock Price = $28.75 Number of shares outstanding = 240.46Market Value of Debt = $3,359.94 If no, enter the followingWould you like to use the book value debt ratio? NoIf no, enter the debt ratio to use in valuation 32.71%

General Market DataLong Term Risk free rate= 2.50%Risk premium for equity = 5.89%

RatingsDo you want to estimate the firm's synthetic rating = NoIf yes, choose the type of firm  If not, what is the current rating of the firm? BBEnter the cost of debt associated with the rating = 4.25%

OptionsDo you have equity options (management options, warrants) outstanding? YesIf yes, enter the number of options 19.20Average strike price $12.64 Average maturity 7.58Standard Deviation in stock price 27.69%Do you want to use the stock price to value the option or your estimated value?

Current Price

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Valuation InputsHigh Growth PeriodLength of high growth period = 5Beta to use for high growth period for your firm= 1.51Do you want to keep the debt ratio computed from your inputs? YesIf yes, the debt ratio that will be used to compute the cost of capital is 32.63%If no, enter the debt ratio that you would like to use in the high growth period  Do you want to keep the existing ratio of working capital to revenue? YesIf yes, the working capital as a percent of revenues will be 31.52%If no, enter the ratio of working capital to revenues to use in analysis  Do you want to compute your growth rate from fundamentals? YesIf no, enter the expected growth rate in operating income for high growth period  If yes, the inputs to the fundamental growth calculation (based upon your inputs) areReturn on Capital = 8.28%Reinvestment Rate = -76.65%Do you want to change these inputs? YesReturn on Capital = 8.28%Reinvestment Rate = 100.00%

Do you want me to gradually adjust your high growth inputs in the second half? Yes

Stable Growth PeriodGrowth rate during stable growth period = 2.49%Beta to use in stable growth period = 0.90Risk premium for equity in stable growth period = 5.89%Debt Ratio to use in stable growth period = 35.01%Pre-tax cost of debt in stable growth period = 4.25%Tax Rate to use in stable growth period = 39.27%To compute the reinvestment rate in stable growth, you have two optionsDo you want to compute reinvestment needs in stable growth based on fundamentals? YesIf yes, enter the return on capital that the firm will have in stable growth 8.28%If no, enter capital expenditure as % of depreciation in stable growth  

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APPENDIX L6: Valuation Model Results

Appendix A6 shows our models input summary and final valuation.

Input SummaryNormalized EBIT (before adjustments) $565.20

Adjusted EBIT = $561.23

Adjusted Interest Expense = $196.05

Adjusted Capital Spending $150.30

Adjusted Depreciation & Amort'n = $323.87

Tax Rate on Income = 35.00%

Current Revenues = $4,113.30

Current Non-cash Working Capital = $1,296.50

Chg. Working Capital = ($87.69)

Adjusted Book Value of Debt = $3,753.35

Adjusted Book Value of Equity = $1,044.70

Length of High Growth Period = 5 Forever

Growth Rate = 8.28% 2.49%Debt Ratio used in Cost of Capital Calculation= 32.63% 35.01%

Beta used for stock = 1.51 0.90

Risk free rate = 2.50% 2.50%

Risk Premium = 5.89% 5.89%

Cost of Debt = 4.25% 4.25%

Effective Tax rate (for cash flow) = 39.27% 39.27%

Marginal tax rate (for cost of debt) = 35.00% 39.27%

Return on Capital = 8.28% 8.28%

Reinvestment Rate = 100.00% 30.10%

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Output from the program

Cost of Equity = 11.39%

Equity/(Debt+Equity ) = 67.37%

After-tax Cost of debt = 2.76%

Debt/(Debt +Equity) = 32.63%

Cost of Capital = 8.57%

Intermediate Output

Expected Growth Rate 8.28%Working Capital as percent of revenues = 31.52% (in percent)

The FCFF for the high growth phase are shown below (up to 10 years)

  Current 1 2 3 4 5Terminal Year

Expected Growth Rate   8.28% 8.28% 7.12% 4.81% 2.49%  

Cumulated Growth   108.28% 117.24% 125.59% 131.63% 134.91%  

Reinvestment Rate   100.00% 100.00% 86.02% 58.06% 30.10%  

EBIT $561 $608 $658 $705 $739 $757  

Tax rate (for cash flow) 39.27% 39.27% 39.27% 39.27% 39.27% 39.27% 39.27%

EBIT * (1 - tax rate) $341 $369 $400 $428 $449 $460 $440.33

- (CapEx-Depreciation) ($174) $262 $283 $260 $182 $96 $84.46

-Chg. Working Capital ($88) $107 $116 $108 $78 $43 $48.08

Free Cash flow to Firm $602 ($0) $0 $60 $188 $321 $307.79

Cost of Capital   8.57% 8.57% 8.05% 7.01% 5.97%  

Cumulated Cost of Capital   1.0857 1.1788 1.2737 1.3631 1.4444  

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Present Value   ($0) $0 $47 $138 $223  

Growth Rate in Stable Phase = 2.49%Reinvestment Rate in Stable Phase = 30.10%

FCFF in Stable Phase = $307.79 Cost of Equity in Stable Phase = 7.80%

Equity/ (Equity + Debt) = 64.99%AT Cost of Debt in Stable Phase = 2.58%

Debt/ (Equity + Debt) = 35.01%Cost of Capital in Stable Phase = 5.97%Value at the end of growth phase = $8,847.21

ValuationPresent Value of FCFF in high growth phase = $407.55

Present Value of Terminal Value of Firm = $6,125.04

Value of operating assets of the firm = $6,532.59

Value of Cash, Marketable Securities & Non-operating assets = $491.90

Value of Firm = $7,024.49

Market Value of outstanding debt = $3,456.99

Minority Interests $67.50

Market Value of Equity = $3,500.00

Value of Equity in Options = $225.59

Value of Equity in Common Stock = $3,274.41

Market Value of Equity/share = $13.62

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