DELPHI 2011 Annual Report Download - page 93

Table of Contents
approach commonly used to value business interests. The DCF method involves estimating future cash flows of a business and discounting them
to their present value. The discount rate is selected based on consideration of the risks inherent in the investment and market rates of return
available from alternative investments of similar type and quality as of the valuation date. More specifically, the DCF method bases the value of a
company on the cash flow attributable to that company. This approach is based on the assumptions that: (i) a company is worth what it can
generate in future cash flows to its owners; (ii) the future cash flows are reasonably predictable; and (iii) the cost of capital and investors' required
rates of return on invested capital can be estimated. This approach assumes that the income derived from a company will, to a large extent,
determine the value of that company.
The DCF method was based on Company-prepared projections which included a variety of estimates and assumptions. While the Company considers
such estimates and assumptions reasonable, they are inherently subject to significant business, economic and competitive uncertainties, many of which are
beyond the Company's control and, therefore, may not be realized. Changes in these estimates and assumptions may have a significant effect on the
determination of the fair value of the assets acquired and liabilities assumed in the Acquisition. Accordingly, there can be no assurance that the estimates,
assumptions, and values reflected in the valuations will be realized, and actual results could vary materially. The following key assumptions were utilized in
applying the DCF method:
• Delphi provided its independent valuation specialist with projected net sales, expenses and cash flows, for the years ending December 31, 2010,
2011 and 2012 representing the Company's best estimates at the time the analysis was prepared.
• Discount rates to determine the present value of the future cash flows from 2010 through 2012 and the terminal values were based on the
weighted average cost of capital ("WACC"). The WACCs measure the average cost per dollar of capital of an enterprise based on the individual
costs of debt and equity and the business unit's target capital structure. The WACC is derived based on a set of guideline public companies for
each business unit, and is an indicator of the cost of capital for a market participant in the business unit's industry. The cost of equity estimated
using the capital asset pricing model was between 13.4% and 23.5%, with a median of 16.4%. The pre-tax cost of debt was estimated to be 8%
based on the yield on Delphi's guideline companies' publicly traded bonds as of the Acquisition Date. The range of WACCs for the business units
was between 10.3% and 18.8% with a median of 13.6%.
• Terminal value for each business unit was based on the Gordon Growth Model using a range of long-term growth rates of 0% to 5%, with a
median of 3%.
• Market Approach: The market approach measures the value of a company through the analysis of recent sales or offerings of comparable companies.
The guideline public companies method and the guideline merged or acquired company method are the most common forms of the market approach
used to value business interests. Use of the market approach requires that comparable transactions be available, which may include:
• The recent sales price of the same or similar companies or assets in an arm's-length transaction; or
• The market price for the license of the same or similar assets to an independent third party.
In applying the market approach, unique sets of comparable guideline public companies were identified using the Capital IQ data services. Capital IQ
was used as the source of data to determine the guideline public companies' Total Invested Capital ("TIC" defined as Market value of equity + Market value
of debt + Market value of preferred stock and minority interest). The TIC was then calculated as a multiple of Trailing Twelve Months ("TTM") Revenue,
TTM Earnings Before Interest, Tax, Depreciation and Amortization ("EBITDA"), TTM Earning Before Interest, and Tax ("EBIT"), Next Fiscal Year ("NFY")
Revenue, NFY EBITDA, NFY EBIT, and NFY+1 EBITDA. For the NFY financial data, revenue and earnings estimates were obtained from
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