Question

Problem 12-21 Firm Valuation Happy Times, Inc., wants to expand its party stores into the Southeast....

Problem 12-21 Firm Valuation

Happy Times, Inc., 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 6 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 4 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 30 percent.

a. What is the maximum share price that Happy Times should be willing to pay for Joe’s? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Maximum share price           $

After examining your analysis, the CFO of Happy Times is uncomfortable using the perpetual growth rate in cash flows. Instead, she feels that the terminal value should be estimated using the EV/EBITDA multiple. The appropriate EV/EBITDA multiple is 8.

b. What is your new estimate of the maximum share price for the purchase? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Maximum share price           $

0 0
Add a comment Improve this question Transcribed image text
Answer #1

A) EBIT at end of 5 years =13(1+0.08)^5 =19.10.

Cash flow at Year 5= 19.10 +.06*19.10(depr)-0.13*19.10(capitalspends)-0.07*19.10(Nwc expense)=0.86*19.10=16,42

Terminal Value = FCF5 (1-T)(1+G)/(r-g)

SO terminal value = (16.42*0.7(1+0.04)/(0.11-0.04) = 170.77

Ans A : 170.77Million for Joe as per this method

Ans B

Lets assume Max value of share price of Joe that Happy should pay =X

EV of Joe = 2.15M*X +Debt-Cash. EBIT of Joe = 13. D&A of Joe =6% of EBIT so EBITDA = 13*1.06=13.78

Cash =13(1+(0.06-0,07-0.13)*0.7=7.64

EV/EBITDA = (2.15X+33.5-7,64)/13.78 = 8 2.15X+25.86=13.78*8=110.24 Solving for X= (110.24-25.86)/2.15 =39.24 per share Happy should pay

Add a comment
Know the answer?
Add Answer to:
Problem 12-21 Firm Valuation Happy Times, Inc., wants to expand its party stores into the Southeast....
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for? Ask your own homework help question. Our experts will answer your question WITHIN MINUTES for Free.
Similar Homework Help Questions
  • Happy Times, Inc., wants to expand its party stores into the Southeast. In order to establish...

    Happy Times, Inc., 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 6 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...

  • Happy Times, Inc., wants to expand its party stores into the Southeast. In order to establish...

    Happy Times, Inc., 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 $160 million and a YTM of 7 percent. The company’s market capitalization is $400 million, and the required return on equity is 12 percent. Joe’s currently has debt outstanding with a market value of...

  • Happy Times, Inc., wants to expand its party stores into the Southeast. In order to establish...

    Happy Times, Inc., 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 $120 million and a YTM of 6 percent. The company’s market capitalization is $340 million, and the required return on equity is 11 percent. Joe’s currently has debt outstanding with a market value of...

  • Happy Times, Inc., wants to expand its party stores into the Southeast. In order to establish...

    Happy Times, Inc., 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 6 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...

  • Happy Times, Inc., wants to expand its party stores into the Southeast. In order to establish...

    Happy Times, Inc., 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 $220 million and a YTM of 9 percent. The company’s market capitalization is $300 million, and the required return on equity is 14 percent. Joe’s currently has debt outstanding with a market value of...

  • Happy Times, Inc., wants to expand its party stores into the Southeast. In order to establish...

    Happy Times, Inc., 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 $220 million and a YTM of 7 percent. The company's market capitalization is $460 million, and the required return on equity is 12 percent. Joe's currently has debt outstanding with a market value of...

  • Happy Times, Inc., wants to expand its party stores into the Southeast. In order to establish...

    Happy Times, Inc., 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 $150 million and a YTM of 5 percent. The company's market capitalization is $390 million and the required return on equity is 10 percent. Joe's currently has debt outstanding with a market value of...

  • Happy Times, Inc., wants to expand its party stores into the Southeast. In order to establish...

    Happy Times, Inc., 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 $220 million and a YTM of 7 percent. The company's market capitalization is $460 million, and the required return on equity is 12 percent. Joe's currently has debt outstanding with a market value of...

  • Problem 1 (15 points) Happy Times, Inc., wants to expand its party stores into the Southeast....

    Problem 1 (15 points) Happy Times, Inc., wants to expand its party stores into the Southeast. In order to establish an mediate 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 &$105 million and a YIM of 6 percent. The company's market capitalization is $285 million and the required return on equity is 11 percent. Joe's currently has debt outstanding with a...

  • Problem 13-20 Firm Valuation Schultz Industries is considering the purchase of Arras Manufacturing. Arras is currently...

    Problem 13-20 Firm Valuation Schultz Industries is considering the purchase of Arras Manufacturing. Arras is currently a supplier for Schultz and the acquisition would allow Schultz to better control its material supply. The current cash flow from assets for Arras is $8.3 million. The cash flows are expected to grow at 7 percent for the next five years before leveling off to 4 percent for the indefinite future. The costs of capital for Schultz and Arras are 11 percent and...

ADVERTISEMENT
Free Homework Help App
Download From Google Play
Scan Your Homework
to Get Instant Free Answers
Need Online Homework Help?
Ask a Question
Get Answers For Free
Most questions answered within 3 hours.
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT