6. Merger analysis - Free cash flow to equity (FCFE) approachConsider the following acquisition data regarding Washington Company and Purple Turtle Corp.:Washington Company is considering an acquisition of Purple Turtle Corp. Washington Company estimates that acquiring Purple Turtle willresult in incremental value for the firm. The analysts involved in the deal have collected the following information from the projectedfinancial statements of the target company.Data Collected (in millions of dollars)Year 1Year 2Year 3EBIT$11.0$13.2$16.5Interest expense3.03.33.6Debt34.140.343.4Total net operating capital 105.1 107.1 109.1Purple Turtle is a publicly traded company, and its market-determined pre-merger beta is 1.60. You also have the following informationabout the company and the projected statements.• Purple Turtle currently has a $12.00 million market value of equity and $7.80 million in debt.•The risk-free rate is 5% with a 7.10% market risk premium, and the Capital Asset Pricing Model produces a pre-mergerrequired rate of return on equity r of 16.36%.• Purple Turtle's cost of debt is 7.00% at a tax rate of 30%.• The projections assume that the company will have a post-horizon growth rate of 4.00%.. Current total net operating capital is $102.0 million, and the sum of existing debt and debt required to maintain a constantcapital structure at the time of acquisition is $31 million.• The firm has no nonoperating assets, such as marketable securities.With the given information, use the free cash flow to equity (FCFE) approach to calculate the following values involved in the merger analysis. (Note:Round your answer to two decimal places.)FCFE horizon valueValue of FCFEValue$90.05 million$46.36 millionThe estimated value of Purple Turtle's operations after the merger is more than the market value of Purple Turtle's equity. This means that thewealth of Purple Turtle's shareholders will increase if it merges with Washington rather than remaining as a stand-alone corporation.False4True or False: The horizon value in the FCFE approach is different from the horizon value in the adjusted present value (APV) approach. The horizononly for equity, whereas the horizon value in the APV approach is for the total value of operations.value in the FCFETrue

Free cash flow of equity (FCFE) is the value that is available for the distribution to the equity…

Answered: Washington Company is considering an…

Financial And Managerial Accounting

15th Edition

ISBN:9781337902663

Author:WARREN, Carl S.

Publisher:WARREN, Carl S.

Chapter26: Capital Investment Analysis

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4. Merger analysis - Adjusted present value (APV) approach Wizard Inc., which is considering the acquisition of Global Satellite Corp. (GSC), estimates that acquiring GSC will result in an incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company: Data Collected (in millions of dollars) Year 1 Year 2 Year 3 EBIT $14.0 $16.8 $21.0 Interest expense 3.0 3.3 3.6 Debt 33.0 39.0 42.0 Total net operating capital 113.3 115.5 117.7 Global Satellite Corp. (GSC) is a publicly traded company, and its market-determined pre-merger beta is 1.00. You also have the following information about the company and the projected statements: • GSC currently has a $28.00 million market value of equity and $18.20 million in debt. • The risk-free rate is 5%, there is a 7.10% market risk premium, and the Capital Asset Pricing Model produces a pre-merger required rate of return on equity SL of 12.10%. •…
5. Merger analysis - Free cash flow to equity (FCFE) approach Consider the following acquisition data regarding Sunny Squirrel Fabricators Inc. and Purple Turtle Corp.: Sunny Squirrel Fabricators Inc. is considering an acquisition of Purple Turtle Corp. Sunny Squirrel Fabricators Inc. estimates that acquiring Purple Turtle will result in incremental value for the firm. The analysts involved in the deal have collected the following information from the projected financial statements of the target company. Data Collected (in millions of dollars) Year 1 Year 2 Year 3 EBIT $16.0 $19.2 $24.0 Interest expense 5.0 5.5 6.0 Debt 31.9 37.7 40.6 Total net operating capital 121.5 123.9 126.3 Purple Turtle is a publicly traded company, and its market-determined pre-merger beta is 1.40. You also have the following information about the company and the projected statements. • Purple Turtle currently has an $18.00 million market value of equity and $11.70 million in debt. The risk-free rate is 3% with…
Topic: Illiquidity, Synergy, Control, Book Value, Sound Value, Liquidation Value, Income Approach, and Forex Translation A Corp. and B Company will be merging. Independently, A has forecasted annual earnings of P400,000 and overall return of 16%. On the other hand, B had dividends of P480,000 last year, an overall return of 15% and a payout ratio of 80%. Once combined, they will have a total equity value of P7,300,000. How much is the value of synergy between the two entities?
Ees The following table shows the projected free cash flows of an acquisition target. The potential acquirer wants to estimate its maximum acquisition price at an 8 percent discount rate and a terminal value in year 5 based on the perpetual growth equation with a 4 percent perpetual growth rate. Year Free cash flow Maximum acquisition price 2 -990 -495 B Maximum acquisition price 4 314 a. Estimate the target's maximum acquisition price. Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar amount. 5 928 b. Estimate the target's maximum acquisition price when the discount rate is 7 percent and the perpetual growth rate is 5 percent. Note: Do not round intermediate calculations. Round your answer to the nearest whole dollar amount.
Cash acquisition decision Benson Oil is being considered for acquisition by Dodd Oil. The combination, Dodd believes, would increase its cash inflows by $25,000 for each of the next 5 years and by $50,000 for each of the following 5 years. Benson has high financial leverage, and Dodd can expect its cost of capital to increase from 12% to 15% if the merger is undertaken. The cash price of Benson is $125,000. Would you recommend the merger? Would you recommend the merger if Dodd could use the $125,000 to purchase equipment that will return cash inflows of $40,000 per year for each of the next 10 years? If the cost of capital did not change with the merger, would your decision in part b be different? Explain.
View Policies Show Attempt History Current Attempt in Progress Your answer is partially correct. Blossom LLC, a leveraged-buyout specialist, recently bought a company and wants to determine the optimal time to sell it. The partner in charge of this investment has estimated the after-tax cash flows from a sale at different times to be as follows: $200,000 if sold one year later; $300,000 if sold two years later; $400,000 if sold three years later; and $500,000 if sold four years later. The opportunity cost of capital is 10.0 percent. Calculate the NPV of each choices. (Do not round factor values. Round answers to the nearest whole dollar, e.g. 5,275.) The NPV of each choice is: NPV1 24 180018 NPV2 %$4 243049 NPV3 %24 291687 NPV4 $. 328181 When should Blossom sell the company? Blossom should sell the company in 4 years
Problem 2 ABM Enterprise would like to evaluate/analyze an investment proposal. Given the following: Investment amount 450,000 (2022) Dividends / Revenue stream - 100,000 for the first year and an interval of 5,000 for the succeeding years Discount rate - 14% a. NPV for the perio 2023 through 2029; b. Total NPV using manual computation; c. Total NPV using the Excel function; and d. IRR rate.
Problem 2 ABM Enterprise would like to evaluate/analyze an investment proposal.Given the following:Investment amount - 450,000 (2022)Dividends / Revenue stream - 100,000 for the first year and an interval of 5,000 for thesucceeding yearsDiscount rate - 14% a. NPV for the perio 2023 through 2029;b. Total NPV using manual computation;c. Total NPV using the Excel function; andd. IRR rate.
Differential analysis involving opportunity costsOn August 1, Rantoul Stores Inc. is considering leasing a building and purchasing thenecessary equipment to operate a retail store. Alternatively, the company could usethe funds to invest in $1,000,000 of 4% U.S. Treasury bonds that mature in 15 years.The bonds could be purchased at face value. The following data have been assembled:Instructions1. Prepare a differential analysis as of August 1 presenting the proposedoperation of the store for the 15 years (Alternative 1) as compared with investingin U.S. Treasury bonds (Alternative 2).2. Based on the results disclosed by the differential analysis, should the proposalbe accepted?3. If the proposal is accepted, what would be the total estimated operatingincome of the store for the 15 years
Topic: Illiquidity, Synergy, Control, Book Value, Sound Value, Liquidation Value, Income Approach, and Forex Translation You are making a proposal to start a corporation that would require invested capital of P9,000,000 but will provide annual earnings of P1,500,000 every year. The capital will be from an 8%- interest, P2,500,000-face value perpetual bonds and the balance from equity requiring a rate of return of 15%. How much is the value of goodwill based on this forecast?
NEED BOTH PARTS Happy Times, Incorporated, wants to expand its party stores into the Southeast. In order to establish an immediate presence in the area, the company is considering the purchase of the privately held Joe’s Party Supply. Happy Times currently has debt outstanding with a market value of $200 million and a YTM of 5.8 percent. The company’s market capitalization is $440 million and the required return on equity is 11 percent. Joe’s currently has debt outstanding with a market value of $33.5 million. The EBIT for Joe’s next year is projected to be $13 million. EBIT is expected to grow at 8 percent per year for the next five years before slowing to 3 percent in perpetuity. Net working capital, capital spending, and depreciation as a percentage of EBIT are expected to be 7 percent, 13 percent, and 6 percent, respectively. Joe’s has 2.15 million shares outstanding and the tax rate for both companies is 21 percent. a.What is the maximum share price that Happy Times should be…
Excel Online Structured Activity: Residual dividend model Walsh Company is considering three independent projects, each of which requires a $6 million investment. The estimated internal rate of return (IRR) and cost of capital for these projects are presented below: Project H (High risk): Project M (Medium risk): Project L (Low risk): Cost of capital = 17% Cost of capital % = 13% Cost of capital = 7% IRR = 21% IRR = 10% IRR = 9% Note that the projects' costs of capital vary because the projects have different levels of risk. The company's optimal capital structure calls for 45% debt and 55% common equity, and it expects to have net income of $14,746,500. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the question below. X Open spreadsheet If Walsh establishes its dividends from the residual dividend model, what will be its payout ratio? Round your answer to two decimal places.

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