1. Dave's Pizza - Fulton Pizza Merger. Dave's pizza is considering a merger with Fulton Pizza. The offer under discussion is a cash offer of $352 million for Fulton Pizza. Both companies have niche markets in the pizza industry, and the companies believe a merger will result in significant synergies due to economies of scale in manufacturing and marketing, as well as significant savings in general and administrative expenses. Matt Robinson, the financial officer for Dave's, has been instrumental in the merger negotiations. Matt has prepared the following pro forma financial statements for Fulton assuming the merger takes place. The financial statements include all synergistic benefits from the merger: 2015 2016 2017 2018 2019 Sales $512,000,00 $576,000,000 $640,000,000 $720,000,000 $800,000,000 0 Production 403,200,000 448,000,000 505,600,000 564,000,000 Costs 359,200,000 Depreciation 48,000,000 51,200,000 52,800,000 53,120,000 53,600,000 Other 51,200,000 57,600,000 64,000,000 72,320,000 77,600,000 expenses EBIT $ 53,600,000 $ 64,000,000 $ 75,200,000 $ 88,960,000 $104,800,000 Interest 12,160,000 14,080,000 15,360,000 16,000,000 17,280,000 Taxable $ 41,440,000 $ 49,920,000 $ 59,840,000 $ 72,960,000 $ 87,520,000 Income Taxes @40% 16,576,000 19,968,000 23,936,000 29,184,000 35,008,000 Net Income $ 24,864,000 $ 29,952,000 $ 35,904,000 $ 43,776,000 $ 52,512,000 Matt knows that Fulton will require investments each year for maintenance of plant. The table below has required investments and sources of financing:Matt knows that Fulton will require investments each year for maintenance of plant. The table below has required investments and sources of financing: 2015 2016 2017 2018 2019 Investments Net working $ 12,800,000 $ 16,000,000 $16,000,000 $19,200,000 $19,200,000 capital Fixed assets 9,600,000 16,000,000 11,520,000 76,800,000 4,480,000 Thanks for rating! Rate 4 more documents to earn a free unlock. Total 22,400,000 $ 32,000,000 $ 27,520,000 $ 96,000,000 $ 23,680,000 Sources of financing New debt $ 22,400,000 $ 10,240,000 $ 10,240,000 $ 9,600,000 $ 7,680,000 Profit 0 21,760,000 17,280,000 17,280,000 16,000,000 retention Total 22,400,000 32,000,000 27,520,000 26,880,000 23,680,000 The management of Dave's feels that that capital structure at Fulton is not optimal. If the merger takes place, Fulton will immediately increase its leverage with a $71 million debt issue, which would be followed by a $96 million dividend payment to Dave's. This will increase Fulton's debt-to-equity ratio from 0.50 to 1.00. Dave's will also be able to use a $16 million tax loss carryforward in 2016 and 2017 from Fulton's previous operations. The total value of Fulton is expected to be $576 million in five years, and the company will have $192 million in debt at that time.Stock in Dave's currently sells for $94 per share, and the company has 11.5 million shares of stock outstanding. Fulton has 5.2 million shares of stock outstanding. Both companies can borrow at 3%. The risk-free rate is SSE. and the expected return on the market is 13%. Matt believes the current cost of capital for Dave's is 11%. The heta for Fulton at its current capital structure is 1.30. Matt has asked you to analyze the financial aspects of the potential merger. Specifically, he has asked you to answer the following questions: 1. Suppose Fulton's shareholders wl agree to a merger price of $6335 per share. Should Dave's proceed with the merger? 2. What is the highest price per share that Dave's should he wling to pay for Fulton? 3. Suppose Dave's is unwilling to pay cash for the merger hut will consider a stock exchange. What exchange ratio would make the merger terms equivalent to the original merger price of $6835 per share? 4. What is the highest exchange ratio Dave's would he willing to pay and still undertake the merger