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