Black Stone Case Study

To assess this loan purchasing deal on a discount cash flow basis, a discount rate should be selected carefully. and our group decide to make use of the CAPM model to estimate the cost of capital of this blackstone since we are already given the beta of this asset. After we plug in the five year average return of S&P 500, which is around 12.8%(2003~2007) and 5 year average 10-year treasury billing yield, which is 4.5%, the final discount rate is 6.14%. As for cash flow, there are three kinds of cash flow involve in this investment, including the coupon payment received from the loan asset, the interest payment on debt provided by citizen group, and most importantly, the principal payment retrieve from loan at the time of exit(we assume it has a 5-year maturity). In addition, both the default possibility and recover rate have substantial effect on these cash flow. We are using average recovery rate from last two decade(1982-2004) as our future prediction, which is quite conservative compared to the high recovery rate in 2004. As the detail calculation show in Exhibit 1, the NPV of this loan deal is around 600 million USD, which justify blackstone’s radical leverage usage on this loan investment. The implied IRR also provided similar result, which is more than 22% per annual and likely to provide some outstanding alpha for this reputable private equity in the next five years.The public bonds get hammered because stock price of marvel drop for 41% after the company announced its’ detailed restructuring plan, in which interest of original shareholders are highly diluted. To specify, the collateral on marvel’s public bond is 77.3 million old shares, which accounts for almost 76% of total issued shares and has a market value of 357.5 million dollar before the restructure. But if the restructure has been undertaken, then these shares only account for 15.1% of total equity(511.8M shares) and worth 124 million dollar given that theoretical price of marvel stocks