1. What is the NPV for the project "should we purchase Company ZED, given all the information compiled above?" Report your answer to two decimal places.

2. Should your firm purchase Company ZED and recapitalize it as envisioned above?

Not enough information is provided to answer this question.

Yes

No

3. Why or why not?

Because this is a positive NPV project

Because this is a negative NPV project

Because the payback period is too long.

Because the payback period is less than three years.

Not enough information is provided to determine a reason.

Valuing an Entity with Buy-Manage-Sell Model Introduction Company ZED is a profitable, debt free entity, operating in steady-state forever. Despite this, the economy is in recession, which has depressed the price of ZED's stock. Your PE firm is considering buying ZED at the asking price of: $200 MM This corresponds to a PE ratio of: 10.75 Your firm believes that an optimal capital structure for the firm would be: 30% D/(D+E) If your firm buys company ZED: You will pay (1-D/(D+E))% of the purchase price with your firm's funds. Have the firm take out a loan at the moment of close, to pay the current owners the rest of the purchase price. Your firm will operate company ZED in its recapitalized steady-state for three years. You will sell ZED at the end of this time, when you believe the entity's PE ratio will have recovered to a more normal value of: 13.9785 Given Constants TRF 4.00% Bu BL 8.00% 1.3000 1.6454 Financing Structure D + E = CAP tot D/(D+E) = WD D Existing As purchased $200 $200.0 0.0% 30.0% $0.0 $200.0 E Key Rates Existing As purchased 7.00% 8.00% ro 9.20% re Income Tax rate 10.58% 38.00% Free Cash Flows FCFE Income Statement Revenue - Depreciation - Other Expenses = EBIT -Interest - Tax = NI Existing D = $0.0 $150.00 ($80.00) ($40.00) $30.00 $0.00 ($11.40) $18.60 As Purchased $150.00 ($80.00) ($40.00) $30.00 $0.00 - A Working Capital + Depreciation = CF operations, E $0.00 $80.00 $98.60 $80.00 CAPX + A Debt ($80.00) $0.00 $18.60 ($80.00) $0.00 = FCFE Valuation at T=0 NPVE = -Pp, E + E FCFE, i/ (1 +12)"' + Sp, e/(1+IE)" Pp.E FCFE = Computed above Spe= NPVE