Kids’ Candy Corporation (KCC), a large nationwide candy manufacturer, is considering the purchase of Holiday Chocolates, Inc. KCC’s management foresees much synergy between the two firms as a key outcome of a possible merger. As the Acquisitions Analyst employed by KCC, you have developed the following estimates for Holiday Chocolate’s incremental “Free Cash Flows” (FCF) for the upcoming four years:
Year |
Free Cash Flow |
1 |
$3.5 million |
2 |
$5.9 million |
3 |
$7.4 million |
4 |
$8.8 million |
Your analysis further predicts that “Free Cash Flows” occurring after Year 4 will grow at a constant four percent (4%) annual rate. Holiday Chocolates, Inc. is estimated to have a “Weighted Average Cost of Capital” (WACC) of 8%, based on the capital structure that will be put in place following the acquisition, if it is made. During your employment at KCC, you have learned that the management team prefers the “Corporate Valuation Model” (CVM) method when evaluating possible acquisition candidates.
You are preparing a presentation on this proposal for the management meeting tomorrow; the possible acquisition of Holiday Chocolates, Inc. is considered to be the most important agenda item for this meeting. In preparation for this meeting, you prepare answers to the following questions:
a. Why should KCC not pay more than this amount for Holiday Chocolates, Inc.?
[$ in millions] | 0 | 1 | 2 | 3 | 4 | |
FCF | $ 3.50 | $ 5.90 | $ 7.40 | $ 8.80 | ||
PVIF at 8% | 0.92593 | 0.85734 | 0.79383 | 0.73503 | ||
PV at 8% | $ 3.24 | $ 5.06 | $ 5.87 | $ 6.47 | ||
Sum of PV of FCF years 1 to 4 | $ 20.64 | |||||
a] | HV at the end of year 4 = 8.80*1.04/(0.08-0.04) = | $ 228.80 | ||||
PV of HV = 228.80*0.73503 = | $ 168.17 | |||||
b] | PV of FCF [including PV of HV] | $ 188.82 | ||||
c] | Maximum payable for assets and operations = | $ 188.82 | ||||
d] | Maximum payable for stock = 188.82-12 = | $ 176.82 |
Kids’ Candy Corporation (KCC), a large nationwide candy manufacturer, is considering the purchase of Holiday Chocolates,...
Hastings Corporation, a large telecommunications company, is considering the purchase of Vandell Corporation, a smaller, regional provider in the same industry. Hastings’ management foresees much synergy between the two firms as a key outcome of a possible merger. As the Acquisitions Analyst employed by Hastings, you have developed the following estimates for Vandell’s incremental “Free Cash Flows” (FCF) for the upcoming four years: Year Free Cash Flow 1 $2.5 million 2 $2.9 million 3 $3.4 million 4 $3.57 million These...
. Emerson Enterprises, Inc., a nationwide electronics company, is considering purchasing a smaller regional electronics manufacturer, Midwest Electronics, Inc. Emerson Enterprises’ analysts project that the merger will result in incremental free cash flows as follows: Year Free Cash Flow (FCF) t = 1 $4 million t = 2 $5.5 million t = 3 $6.75 million t = 4 $25 million The Year 4 Free Cash Flow (FCF) listed in the table above includes a horizon value of $15 million. Assume...
Asgard Corp, is considering to purchase a smaller kingdom called Midgard. Asgard’s analysts project that the merger will result in the following incremental free cash flows, horizon values, and tax shields: Year 1 2 3 4 Free cash flow $2 $4 $4 $6 Unlevered horizon value $80 Tax shield $1 $2 $3 $4 Horizon value of tax shield $30 Assume that all cash flows occur at the end of the year and are in millions. Midgard is currently financed with...
Hunter Corp. is considering acquiring Prey Inc. Neither corporation has any debt. Hunter Corp. expects the acquisition of Prey Inc. will generate synergy equal to $1 million per year in after-tax cash flow, indefinitely (a perpetuity, see pages 185 and 186 of the textbook if you need a refresher). Hunter Corp.'s current market value is $70 million. Prey Inc.'s current market value is $30 million. The appropriate discount rate, based on the risk of Prey Inc., is 10%. Hunter Corp....
5. Assuming the free cash flows from synergy will remain level
in perpetuity, estimate the after-tax present value of anticipated
synergy?
Please show all steps.
END OF CHAPTER CASE STUDY: DID UNITED TECHNOLOGIES OVERPAY FOR ROCKWELL COLLINS? Case Study Objectives: To Illustrate • A methodology for determining if an acquirer overpaid for a target firm, • How sensitive discounted cash flow valuation is to changes in key assumptions, and • The limitations of discounted cash flow valuation methods. United Technologies...
PART ONE 1. On May 28, 2021, Pesky Corporation acquired all of the outstanding common stock of Harman, Inc., for $480 million. The fair value of Harman's identifiable tangible and intangible assets totaled $554 million, and the fair value of liabilities assumed by Pesky was $200 million. Pesky performed a goodwill impairment test at the end of its fiscal year ended December 31, 2021. Management has provided the following information: Fair value of Harman, Inc. $ 460 million Fair value...
I will give thumbs up for correct answers! Thank you!
Chadwick Enterprises, Inc., operates several restaurants throughout the Midwest. Three of its restaurants located in the center of a large urban area have experienced declining profits due to declining population. The company's management has decided to test the assets of the restaurants for possible impairment. The relevant information for these assets is presented below. Book value Estimated undiscounted sum of future cash flows Fair value $7.1 million 4.3 million 3.8...
Advanced Accounting Chapter 1 – Extra Problems Large Corporation Large Corporation is considering a merger with Local Company, one of its suppliers. In order to determine a fair offering price, Large has accumulated the following information: Local Company Estimated Book Values Market Value Total identifiable assets $ 250,000 $ 300,000 Total liabilities 150,000 150,000 Owners’ equity $ 100,000 In the last five years, Local has earned a total of $100,000. Large expects that Local’s...
You have been hired as a consultant to ABC company that is seeking to increase its value. ABC has asked you to estimate the value of two privately held companies that ABC is considering acquiring. But first, the senior management of ABC would like for you to explain how to value companies that don't pay any dividends. You have structured your presentation around the following questions. 1. List the two types of assets that companies own. 2. What are assets-in-place?...
Goodwin Technologies, a relatively young company, has been wildly successful but has yet to pay a dividend. An analyst forecasts that Goodwin is likely to pay its first dividend three years from now. She expects Goodwin to pay a $3.7500 dividend at that time (D3-$3.7500) and believes that the dividend will grow by 19.50% for the following two years (D and Ds). However, after the fifth year, she expects Goodwin's dividend to grow at a constant rate of 3.96% per...