Case1 final revised

1091 words 5 pages
Kroll Bond Rating Agency (HBS 9-212-034)
October 23, 2014
Tzyy-Shiuan Chiu, Yuanyuan Hao, Mofan Shi, Hsin-Ping Tso
A Good Time and A Good Idea to Enter the Credit Rating Business
Jules Kroll is planning to enter into the ratings industry. To determine whether it is a good idea and a good time for him to enter into the new business, we project the 5-year NPV for KBRA and apply SWOT analysis to KBRA. The 5-year projected NPV is $341.1 million, a positive number. It is a good time and a good idea for KBRA to enter the business. However, through our SWOT analysis, it would be difficult for KBRA to become competitive in a short time. Thus we suggest it add a credit rating division into the company to make attempts to it but not start up a
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Effect on Kroll’s Opportunities
The lack of credibility in the ratings agencies as a result of what happened in the mortgage crisis presented an opportunity for a new rating agency. This give Kroll greater opportunities to developing KBRA to a first-tier rating agency represented a large financial commitment, and entailed developing a new credit analysis organization staffed with experts, building new customer relations, and handling extensive regulatory requirements.
NPV of 5-Year KBRA
We use Exhibit 4 and 5 to calculate KBRA’s NPV. A simplified financial projections shows below.
KBRA’s NPV Calculation ($ million)

Year 1
Year 2
Year 3
Year 4
Year 5
KBRA’s Operating Cash Flow
-9
-8
-1
18
39
Long Term Growth Rate (assume)
3.20%

10-year Treasury yields
3.73%

Moody’s Beta
1.4

Risk Premium
5%

Cost of Equity (MCO)
10.73%

KBRA’s Terminal Value

534.502
KBRA’s Total Free Cash Flow
-9
-8
-1
18
573.502
KBRA’s NPV
$341.10

To determine KBRA’s NPV, we need to use some of the financial indicators of Moody’s Corporation (MOC) because they both in the same industry. For long term growth rate, we can’t use MCO’s average growth rate of revenue from crediting from 2000-2009 because the rates varied seriously. As a result, we assumed the revenue growth will be greater than 2.4%, the growth rate of MOC in 2009, because 2009 is a tough time for three big credit ratings company. However, at

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