1) Longview Manufacturing Corporation (LMC) is considering acquiring Tyler Technologies Corporation (TTC). TTC has 1.2 million shares outstanding and a target capital structure consisting of 36% debt; its beta is 1.6 (given its target capital structure). TTC has $13 million in debt that trades at par and pays a 9% interest rate. TTC's current free cash flow (FCF0) is $2.4 million per year and is expected to grow at a constant rate of 4% a year. TTC pays a 25% combined federal-plus-state tax rate, the same rate paid by LMC. The risk-free rate of interest is 5%, and the market risk premium is 7%. LMC's first step is to estimate the current intrinsic value of TTC.

a. What is TTC's cost of equity?

b. What is TTC's weighted average cost of capital?

c. What is TTC's intrinsic value of operations? (Hint: Use the free cash flow corporate valuation model from Chapter 8 since the capital structure isn’t changing.)

d. Based on this analysis, what is the minimum stock price that TTC's shareholders should accept?

2) LMC estimates that if it acquires TTC, synergies will cause TTC's free cash flows to be $2.8 million, $3.3 million, $3.7 million, and $4.0 million at Years 1 through 4, respectively, after which the free cash flows will grow at a constant 4% rate. LMC plans to assume TTC's $13 million in debt (which has a 9% interest rate) and raise additional debt financing at the time of the acquisition. Hastings estimates that interest payments will be $1.8 million each year for Years 1, 2, and 3. After Year 3, a target capital structure of 36% debt will be maintained. Interest at Year 4 will be $2.1 million, after which the interest and the tax shield will grow at 4%.

e. What is the intrinsic unlevered value of operations at t = 0 (assuming the synergies are realized)?

f. What is the value of the tax shields at t = 0?

g. What is the total intrinsic value at t = 0? What is the intrinsic value of TTC's equity to LMC? What is the maximum price per share that LMC should offer TTC's shareholders?