Kenneth Cole Productions (KCP) was acquired in 2012 for a purchase price of $15.25 per share. KCP has 18.5 million shares outstanding, $45 million in cash, and no debt at the time of the acquisition.

a. Given a weighted average cost of capital of 11%, and assuming no future growth, what level of annual free cash flow would justify this acquisition price?

b. If KCP’s current annual sales are $480 million, assuming no net capital expenditures or increases in net working capital, and a tax rate of 35%, what EBIT margin does your answer in part

(a) require?

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