A holding company listed on the Athens Stock Exchange (ASE), which invested the majority of its capital (80%) in the real estate and banking sector five years ago, has experienced a dramatic decline in its stock price over the past two years. Since then, no restructuring of its portfolio has taken place. This led the major shareholders to take action and put pressure on the company to change its investment policy. As a result, the management team was forced to conduct a hasty study proposing the acquisition of a well-known food and catering chain. However, since these shareholders have lost trust in the company's management, they have assigned the specialized department of the company's business consultants, where you work, to verify the accuracy of the valuation calculations for the food company. Their aim is to subsequently challenge the management's proposal at the General Shareholders' Meeting.

The acquisition offer price resulting from the initial management study is 2.39 per share. You have collected the data from Tables 1a and 1b, which are consistent with the ones used by the current management team, including forecasts for a five-year time horizon.

After the completion of the five-year period for calculating the terminal value, you have decided to use the Gordon Growth Model as a template for the terminal growth rate. However, you will need to calculate the Cost of Equity (CoE) and the weighted average cost of capital (WACC) of the target acquisition company based on the assumptions that the yield on the 10-year German risk-free government bond is 2.5%, the market risk premium (Rm-Rf) for the Greek market is 8%. The market beta (E) of the food company is 0.65. The tax rate is 22%.

The pre-tax cost of borrowing for the company is currently 6% based on its current level of debt. However, it is anticipated that as a result of the acquisition, within 2023, the acquiring company (the purchasing company) will require the target company to double its existing debt (in absolute terms) in order to upgrade its production line. Consequently, the creditworthiness of the company will decrease, and the cost of borrowing will increase to 7%. At the same time, you estimate that due to the increase in debt, the company should not pay dividends at least for the year 2023, and therefore it will retain its profits.

The data regarding the target company under acquisition are as follows:

Table 1a. Key Fundamental Figures of Food Company as of December 31, 2022:

Sales	80,000,000
Equity (book value)	20,000,000
Total Bank Borrowings:	10,000,000
Total Bank Borrowings*:	..................
Interest Expenses*	1,000,000
Extraordinary Profits/(Losses):	500,000
Cash and Cash Equivalents*:	2,000,000
Number of Shares	10,000,000
Market Value of the Company as of June 12, 2023:	18,000,000
Share Price as of June 12, 2023:	1.80

Note: *These figures are as of December 31, 2023.

Table 1b. Key Assumptions & Hypotheses:

Sales growth rate for the next 5 years (2023-2027):	6.00%
Cost of Goods Sold as a percentage of Sales:	80.00%
General and Administrative Expenses as a percentage of Sales:	10.00%
Depreciation (as a percentage of Sales):	3.00%
Tax Rate:	22.00%
New Investments in Fixed Assets (as a percentage of Sales):	4.00%
Working Capital (as a percentage of Sales):	2.00%
Long-term growth rate (after the year 2027):	2.00%
Beta () of the food company:	0.65
Market Risk Premium:	8.00%
Risk-Free Rate (Rf):	2.50%
Pre-tax Cost of Borrowing (Cd-pretax) of the company before additional borrowing:	6.00%
Pre-tax Cost of Borrowing (Cd-pretax) of the company after additional borrowing:	7.00%

2. Calculate the value of equity per share of the food company:

a) Based on the DCF method (before the increase in borrowing).

Table 3a. Value of Equity - Management's Proposal for the company

	2023	2024	2025	2026	2027	After 2027
Sales
Cost of Goods Sold
General and Administrative Expenses
Depreciation
Operating Profit - Earnings Before Interest and Taxes (EBIT)
EBIT*(1-Tax Rate)
Depreciation
New Capital Expenditures (CAPEX)
Additional Investments in Working Capital (WCAP)
Free Cash Flows (FCFs)*
Terminal Value (Gordon's model)
Discount Factor (Discount Rate)
Discounted Cash Flows (DCFs)
Enterprise Value
Total Interest Bearing Debt
Cash and Cash Equivalents
Value of Equity
Value of Equity per Share
Premium / Discount on current stock price

Note: FCFs = EBIT(1-Tax Rate) - CAPEX + Depreciation WCAP

b) Calculate the value of equity per share of the food company:

Based on the DCF method (after the increase in borrowing)

Table 3b. Value of Equity - Your Proposal

	2023	2024	2025	2026	2027	After 2027
Sales
Cost of Goods Sold
General and Administrative Expenses
Depreciation
Operating Profit - Earnings Before Interest and Taxes (EBIT)
EBIT*(1-Tax Rate)
Depreciation
New Capital Expenditures (CAPEX)
Additional Investments in Working Capital (WCAP)
Free Cash Flows (FCFs)*
Terminal Value (Gordon's model)
Discount Factor (Discount Rate)
Discounted Cash Flows (DCFs)
Enterprise Value
Total Interest Bearing Debt
Cash and Cash Equivalents
Value of Equity
Value of Equity per Share
Premium / Discount on current stock price

Note: FCFs = EBIT(1-Tax Rate) - CAPEX + Depreciation WCAP

c. You have decided to supplement your study with the value of equity derived from the method of comparable transactions, relying on certain indicators provided to you by the auditors, which were not included in the management's report. What is the value resulting from this method?

Table 4. Value of Equity based on Comparable Transactions Method

Multiples Method (Comparable Transactions)

Expected Ratio for 2023	Index Value	Company Size Value in 2023	Total Value of Equity in Euros for the Food Company
Price to Book	1.2
Price to EBIT	2.0
Price to Sales	0.4
Average Weighted Value of Total Equity
Average Weighted Value per Share

Does it closely align or significantly deviate from the value obtained from Table 3b, and why might this be happening? Are the two methods comparable, and why? Ultimately, what do you recommend to the major shareholders regarding the management's errors and the replacement?